Question 3 (a) Ann Lee is the portfolio manager of a Singapore based equity fund. She is analysing the value of Union Chemical Bhd which manufactures fertilizers and food additives. The company's dividend per share for the fiscal year ended 30 June 2021 was RM0.20 and its current share price is RM8.50 each. Analysts have forecasted a 30% growth rate for the next 5 years and thereafter 9.4% per year forever. Required: (i) Assuming a 13.9% discount rate, estimate the value of Union Chemical Bhd. (6 marks)

(ii) Determine whether Union Chemical Bhd is undervalued or overvalued. (2 marks)

(iii) "The constant-growth model should not be used with just any stock." Explain with reasons the assumptions used by analysts when using the constant- growth dividend model. (4 marks)

(b) Berk Bhd issues bonds that pay interest semi-annually and have maturities of 1 year and 30 years. The bonds have a face value of RM1,000 and an annual coupon rate of 10 percent. Required: (i) If investors have demanded an interest rate of 5 percent on the bond investment, what is the maximum prices to pay for the 1-year bond and 30-year bond? (4 marks)

(ii) Suppose that the interest rate has increased to 20%, calculate the values of the 1-year bond and 30-year bond. (2 marks)

(iii) Based on the calculations in parts (b) (i) and (ii) above, explain with reasons the fundamental relationship between interest rates and bond maturity. (6 marks)

(iv) Briefly explain the meaning of the terms "bond's coupon rate", "current yield", and "yield to maturity". (3 marks)

(v) Explain why bonds have protective covenants. (3 marks)