Question 3: CLO2 Valuation Principles (20 marks)

Relief Pharmaceuticals is expecting a growth rate of 14% for the next two years due to its new drug. Thereafter it should level to an 8% growth rate. The last dividend paid was $0.65 per share. What price should the stock sell for if investors require 12% return? (7 marks)

PCCJ, a petroleum processing technology firm, issued a 10% coupon, 20 year to maturity first mortgage bond five years ago. If the current market rate of debt for PCCJ is 8%, at what price should this bond sell, to the nearest dollar? Assume a par value of $1,000 and that it pays interest semiannually. (6 marks)

Janet has a portfolio of 8 securities, each with a market value of $5,000. The current beta of the portfolio is 1.28, and the beta of the riskiest security is 1.75. She wishes to reduce her portfolio beta to 1.15 by selling the riskiest security and replacing it with another security with a lower beta. What must be the beta of the replacement security? (7 marks)