Question 5

Amiba PLC is looking for financial investments in the securities market. Two investment options are available in different securities: Bonds and ordinary shares.

• Company A is issuing bonds having 12% coupon rate. Interest is paid semi-annually. The bonds have a face value of $1,000 each and will mature 10 years from now.

• Company B is issuing ordinary shares and just paid a dividend of $6.50 per share. The Company Management agreed on the steady growth of 12% in dividends and earnings over the foreseeable future. The required rate of return for shares of this type is 18%.

Required:

1. Compute the current value of company A bonds if the required rate of return is 10% annually.

ANSWER a:

1. Calculate the current value of company B share

ANSWER b:

1. Explain why preference shares would be viewed as less risky to investors than ordinary shares.

ANSWER:

1. Explain the differences between coupon rate and yield to maturity.

ANSWER: