Question 1:

1. Calculate the share price of the following two shares. The cost of capital is 8%.

(i) Stock A is expected to provide a dividend of 7.75 per share forever.

(ii) Stock B paid an $8.50 dividend per share recently and the dividend is expected to grow at a rate of 2.5% forever.

(10 marks)

2. Calculate the bond price of the following two bonds.

(i) Bond A pays of coupon of 30.00 in perpetuity. The current cost of capital is 8%.

(5 marks)

(ii) Bond B with a face value of $1,000 is maturing in five years year. The yield to maturity is 8% and the coupon is 6%.

15. Marks)

3. If the risk-free rate is 2% and the expected rate of return on the market portfolio is 8%. If the expected rate of return on Stock C is 14%.

1. What is the Beta of Stock C?

(5 marks)

2. How is the equity risk premium calculated?

(10 marks)