Question 1 (25 marks) A client is interested in two investments - an offshore bond and shares in a local company. The client's opportunity cost is 12% [this means that the client can make 12% on other investments]. Assume the EURO: Rand exchange rate is EUR 1:R15 throughout the period of the bond. The dividend for the share is the expected dividend at the end of year one (D1) and not the current dividend (DO). Conditions Total nominal value Total market value of shares (100 000 shares x R1 000 price per share) BZA Bond XTY Ltd - Shares EUR 8 500 000 R100 000 000 Market value of the bond R100 000 000 Coupon (fixed) Interest payments Dividends per share per annum (100 000 shares) (D) Expected dividend growth rate 7% Interest is paid out on the bond each year R100 5% Issue date/Purchase date 1 January 2020 1 January 2020 Maturity date 1 January 2025 19 You are required to use the investment information provided above to answer the following questions: (a) Determine if the present value of each investment's future cash flows is greater than or smaller than its current market value. (10 marks) (b) Calculate the return (or yield to maturity) for each investment. (10 marks) (c) Comment on whether each option (the bond and the shares) is a good investment in view of your answer to (a) and (b) above. (5 marks)