QUESTION 5 [30 MARKS] (a) BNF Ltd has recently paid an annual dividend of Rs1.00 per ordinary share. Earnings and dividends of the company have been growing at the rate of 15% per year over the last three years and are expected to continue for the next four years. Growth rate is expected to fall to a normal 8% per year starting with the fifth year for the foreseeable future. The required rate of return is 12% on the ordinary shares of BNF Ltd. (b) Mrs Clavina owns 500 ordinary shares in BNF Ltd. Supporting your answer with relevant calculations, advise Mrs Clavina on the price at which she should sell the 500 ordinary shares today. [8 marks] A bond issued by GBF Ltd has a par value of Rs1,000. The bond has eight years to maturity and a coupon rate of 7% per year. The current market value of a bond issued by GBF Ltd is Rs930. Calculate the market rate (yield to maturity) [7 marks) (c) (d) Explain fully the relationship between yield to maturity and market prices of bonds in the secondary market. [4 marks] HGL Ltd requires funds for investment purposes and the company is considering raising funds by issuing preference shares. The company expects its dividend for preference shares to be R$0.80 per share and its earnings per share to be R$1.60. The market is currently expecting a return of 8% on preference shares Supporting your answer with relevant calculations, advise HGL Ltd on the maximum price at which it can issue its preference shares. [3 marks] (e) Mr Williamson has an investment from which he will obtain three equal payments of Rs 100,000. The first payment will arise seven years from today. the second will arise eight years from today and the third will arise 12 years from today. Interest rate is 4% per year and Mr Williamson is willing to sell the investment Supporting your answer with relevant calculations, advise Mr Williamson the price at which he should sell the investment today. [3 marks] (1) Discuss why the valuation of equity is normally more challenging that valuing a bond. [5 marks] Page 7 of 8