Question 3 CLO2: Identify and examine the features of organized securities exchanges and over-the-counter markets; types of stocks; calculations related to valuation of stocks and other securities (16 marks)

a) A firm's next year earnings are expected to be $4.00 per share and the firm follows a practice of paying out 60 percent of earnings as dividends. The long-term growth rate for this firm is 5 percent and the appropriate discount rate is 12 percent. What is the price of this stock? (4 marks)

2. A US company borrows Mexican pesos for one year at 30 percent. During the year, the peso depreciates 15 percent against the dollar. The US tax rate is 35 percent. What is the after-tax cost of this debt in US dollar terms? (4 marks)
3. The Pennington Corporation issued a new series of bonds on January 1, 1979. The bonds were sold at par ($1,000), have a 12 percent coupon, and mature in 30 years, on December 31, 2008. Coupon payments are made semi-annually (on June 30 and December 31). What was the price of the bond on 25 years later, assuming that the level of interest rates had fallen to 10 percent? (4 marks)
4. Every financial market performs the following function: (4 marks)

• It determines the level of interest rates.
• It allows common stock to be traded.
• It allows loans to be made.
• It channels funds from lenders-savers to borrowers-spenders.

Only one (1) of the statements above is 100% correct, explain what de-selects each of the incorrect statements.