You have to give your valuable explanation on the following investments:

• Investment A: Yoyo Inc. issues a 15 years $2555 bond that pays $99 annually. The market price for the bond is $1000. The markets required yield to maturity on a comparable risk bond is 10%.
• Investment B: Balloon Corps stock price was at $150 per share when it announced that it would cut its dividends for next year from $15 per share to $5 per share, with the additional funds to be used for expansion. Prior to the dividend cut, Balloon Corp expected its dividends to grow at a 5% rate, but with the expansion, dividends are now expected to grow at 8%.

Required:

1. What is the value of the bond to you?

[Answer and show workings here] Use the formula sheet at the end of the document

2. What happens to the value if the markets required yield to maturity on a comparable risk bond (i) increases to 15% or (ii) decreases to 10%? Under which of the circumstances, should you purchase the bond?

[Answer and show workings here] Use the formula sheet at the end of the document

(c) According to Investment 2, how do you think the announcement will affect Balloon Corps stock price?