Question
The company is currently focusing to expand its business units therefore it needs extra funds to purchase new assets. The company has already issued both
The company is currently focusing to expand its business units therefore it needs extra funds to purchase new assets. The company has already issued both preferred and common stock in the market. company is able to sell 18% preferred stock issue at Rs.100 par value and the required rate of return on this investment is 15%.
However the demand of companys Common stock is increasing day by day in the market. The Companys financial highlights show that it has announced Rs. 6 dividend on common stock this year. According to investor expectations it would grow at the rate of 5% for next 3 years, then at the rate of 6% for next 3 years and then at the rate of 7% thereafter. If required rate of return of investor is 14%.
The companys financial analysist has proposed the directors to issue Perpetual Bonds and Coupon Bonds to raise funds instead of taking loan from banks. For this purpose company is also analyzing that if Rs.1000 par value bond with coupon rate of 11% is issued in marker for maturity period of 14 years then what would be the current market price of bond keeping in view that investors required rate of return on this bond is 10%.
You are supposed to calculate value of this bond and also highlight difference between perpetual bond and coupon bond.
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