Question Part A

ABC has a standard dividend policy. The company will pay a dividend of 2 per share in one year. Following this payment, the company will increase dividends by 3% each year forever. The required return on the companys equity is 6%. Show how you will develop the valuation formula given the above situation. What are the assumptions of this model? What will be a fair price for each ABC share? Required return is the discount rate for the corresponding security.

Question Part B

ABC has 10 million shares of equity outstanding. The current share price is 50 and the book value per share is 5. ABC also has one bond issue outstanding. The bond issue has a face value of 70 million, has an 8% coupon, and sells for 93% of its par value. The bond issue matures in 5 years. The bond makes semi-annual payments. The tax rate is 28%. Estimate the yield to maturity of the bond issue to the nearest whole number.