Question
Q No 4: (8 Marks) A) Microtech Corporation is expanding rapidly and currently needs to retain all of its earnings, hence it does not pay
Q No 4: (8 Marks) A) Microtech Corporation is expanding rapidly and currently needs to retain all of its earnings, hence it does not pay dividends. However, investors expect Microtech to begin paying dividends, beginning with a dividend of $1.00 coming 3 years from today. The dividend should grow rapidlyat a rate of 50 percent per yearduring Years 4 and 5, but after Year 5 growth should be a constant 8 percent per year. If the required return on Microtech is 15 percent, what is the value of the stock today? [2] B) MNO Limited just announced a dividend of Rs 4 per share. The EPS for the period was Rs 8. The current return on equity of the company is 10%. The market is currently offering a premium of 8% and the existing rate on treasury bills is 8%. The volatility of MNO with respect to market movement is 1.2. Calculate fair value of stock. [2] C). It is now January 1, 2009, and you are considering the purchase of an outstanding bond that was issued on January 1, 2007. It has a 8.5 percent annual coupon and had a 30-year original maturity. (It matures on December 31, 2036.) There was 5 years of call protection (until December 31, 2010), after which time it can be called at 111 (that is, at 111 percent of par, or $1,110). Interest rates have declined since it was issued, and it is now selling at 116.575 percent of par, or $1,165.75. [4] a. What is the yield to maturity? What is the yield to call? b. If you bought this bond, which return do you think you would actually earn? Explain your reasoning. c. Suppose the bond had been selling at a discount rather than a premium. Would the yield to maturity then have been the most likely actual return, or would the yield to call have been most likely?
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