Task A .Bond Valuation:

The information below relates to $1000 par value bonds issued by Microsoft, GE Capital and Morgan Stanley at the end of 2012. Assume that you are thinking of buying these bonds as of January 2013. Answer the following questions:

1. Assuming that interest is paid annually, calculate the values of the bonds if your required rates of return are as follows: Microsoft 6 %; GE Capital 8% and Morgan Stanley 10% where: (12 marks)

	Microsoft	GE capital	Morgan Stanley
Coupon interest rate	5.25%	4.25%	4.75%
Years to maturity	30	10	5

2. How would the value of the bonds change if:

1. your required rate of return increased by 2% or
2. decreased by 2% (6 marks)

3. Explain the implication of your answers in B. in terms of discount bond and premium bond (6 marks)

Task B- Stock Valuation.

A.) Aspen Ltd common stock currently pays an annual dividend of $2.80 per share.

The required return on the stock is 15 %.

i.) Calculate the value of the common stock ifdividends are expected to grow at a constant rate of 10% per annum. [ 5 marks]

ii) If the firm currentdividend is expected to grow at 10% for the next three years after which growth rate will decrease to 5% forever. Assuming 15% required rate of return.

Compute the value of the share. [ 6 marks]

B) You are considering two (2) investments.

1. The first is a preferred stock ($100 par value) that pays an annual dividend of 12% per

share. Your required rate of return for this stock is 14%.

2. The second investment is a common stock that recently paid a dividend of $3.00. The

firms expected growth rate in dividends per share for the indefinite future is 7%. You

think that a reasonable required rate of return for the stock is 20%.

REQUIRED:

i. Calculate the present value of each security based on your required rate of return.

[4 marks]

ii. If the preferred stock currently sells for $120, what is your required rate of return?

[3 marks]

iii. What is the value of the common stock in five (5) years? [4 marks]

iv. If the common stock currently sells for $35, what is your expected rate of return?

[4 marks]

[ Total 50 marks]