QUESTION 1 Bonds and Stocks Valuation A) Sintokyo Berhads seven-year RM1,000 par bonds pay 9 percent interest. Your required rate of return is 7 percent. The current market price for the bond is RM1,100.

i. Determine the expected rate of return

ii. What is the value of the bonds to you given your required rate of return ?

iii. Should you purchase the bond at the current market price?

B) The common stock of AMT paid RM1.32 in dividends last year. Dividends are expected to grow at an 8 percent annual rate for an indefinite number of years.

i. If AMTs current market price is RM23.50, what is the stocks expected rate of return?

ii. If your required rate of return is 10.5 percent, what is the value of the stock for you?

iii. Should you make the investment, and why?

QUESTION 2 Cost of Capital Compute the cost for the following:

A. A bond that has a RM1,000 par value (face value) and a contract or coupon interest rate of 11 percent. A new issue would have a floatation cost of 5 percent of the RM1,125 market value. The bonds mature in 10 years. The firms average tax rate is 30 percent and its marginal tax rate is 34 percent.

B. A new common stock issue that paid a RM1.80 dividend last year. The par value of the stock is RM15, and earnings per share have grown at a rate of 7 percent per year. This growth rate is expected to continue into the foreseeable future. The company maintains a constant dividend-earnings ratio of 30 percent. The price of this stock is now RM27.50, but 5 percent flotation costs are anticipated.

C. Internal common equity where the current market price of the common stock is RM43. The expected dividend this coming year should be RM3.50, increasing thereafter at a 7 percent annual growth rate. The corporations tax rate is 34 percent.

D. A preferred stock paying a 9 percent dividend on a RM150 per value. If a new issue is offered, floatation costs will be 12 percent of the current price of RM175.

E. A bond selling to yield 12 percent after floatation costs, but prior to adjusting for the marginal corporate tax rate of 34 percent. In other words, 12 percent is the rate that equates the net proceeds from the bond with the present value of the future cash flows (principal and intrest).