Question 3 (30 marks) Evaluate the following three securities. Security 1: The first security is a $1,000 par value perpetual bond issued by Globe Telecom in the Philippines. It pays an annual coupon interest of 4.2%. The current market yield of this bond is 4.4% p.a. Security 2: The second security is a newly issued five-year corporate bond issued by Wing Tai Corporation in Singapore. The coupon rate is 4.1% p.a., with interest paid every six months. The par value of the bond is $1,000, and the current market yield of this bond is 4.033% p.a. Security 3: The third security is the common stock of Eversmall. Last year, this company paid an annual dividend of $4.5 per share to their common stockholders. It is expected that the dividends will grow at a constant rate of 2% every year indefinitely. The discount rate for this stock is 10%. a. What is the intrinsic value of each security? (12 marks) b. Explain why the coupon rate is different from the market yield of the bonds (e.g. securities 1 and 2). (6 marks) c. Eversmall is considering expanding into India. Earnings and dividends can grow to 5% p.a. but investors would require a higher discount rate of 13.5% for this risky investment. If the management of Eversmall tries to maximize shareholder's wealth, should Eversmall expand into India? (6 marks) d. Consider the plot of bond price-yield of the Globe Telecom and Wing Tai bonds below. Based on the intrinsic model you used in part (a), identify X and Y, i.e. which one is the Globe Telecom perpetual bond, and which is Wing Tai's five-year bond? Suppose market yields are expected to increase. How would the prices of the Globe Telecom and Wing Tai bonds react? Which bond will have a higher proportional change in price (as suggested by the plot)? (6 marks) Bond Price 4.0% Market yield