Question Two

1. Consider the following information for company XYZ:

Current dividend = K4

Dividend 2 years ago = K3.3

Current equity beta = 1.6

Equity risk premium = 10%

Risk free rate = 5%

Calculate the price of a share for this company.

1. Calculate the price of a 10-year, 8% coupon bond for a market interest rate of 3% per half year with a maturity value of K1000. Compare the capital gains for the interest rate decline to the losses incurred when the rate increases to 5%. (4 marks)

2. Using an 8-year, 8% (semi-annual payment) coupon bond and K1000 par value, show the relationship among the coupon rate, current yield and yield to maturity for bonds selling at par. (4 marks)

3. A 10-year maturity 9% semi-annual coupon bond is callable in 5 years at a call price of K1,100. The bond currently sells at a yield to maturity of 8% and has a maturity value of K1000. What is the bonds yield to call? (2 marks)