Question 2

i) JD & Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 10 percent a year for the next 3 years and then the growth rate will be 4 percent per year. The company just paid its annual dividend in the amount of 2.3 per share. What is the current value of one share of this stock if the required rate of return is 6 percent?

ii) The Delta Corporation sells 700 bonds. Each bond has a par value of $1,000. The Bonds are sold on January 1, 2013. The interest rate (coupon rate) listed on the bond is 5%. The bonds pay interest twice per year, June 30th, and December 31st. The bonds are 10-year bonds. The market interest rate (yield) for these types of bonds (debt securities) at the time the bonds are sold (January 1, 2013) is 6% annually.

Requirements:

a)What is the total amount of interest paid to the bondholders over the life of the bonds?

b)What is the present value of the interest payments of a bond over the life of the bonds?

c)What amount is paid the bondholders to retire the bonds at the end of 10 years?

d)What is the present value of the amount paid to bondholders to retire the bonds at the end of 10 years?

iii) What will be the impact of following factors on growth rate of the company i.e., will growth increase or decrease?

1. Increase in the inflation rate 2. Economy in which the firm operates is growing very rapidly. 3. Growth potential of the company in a highly competitive business environment 4. Highly efficient management in growing business environment

iv) What is a bond. List and explain some characteristics of a coupon bond?

v) Bond value changes over time. How will the price of a premium and a discount bond behave as bond approach maturity (assume interest rate remain constant)