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A. Robertsons Ltd is planning to expand its specialty stores into five other states and finance the expansion by issuing 15-year zero coupon bonds with a face value of $1,000.

16 / 01 / 2019 Statistics

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Task 1 This task requires you to identify the various elements/factors that affect the valuation of bonds and shares. Please note that you must segregate the factors for bond and shares separately – minimum four factors for each. You are not only expected to identify the direct factors (the interest rate for example) but also the indirect factors (i.e. the various factors which affects the interest rate itself). To simplify your discussion, you may choose a particular industry to answer this requirement. If you use any articles, textbooks, journals etc. to support your decisions, you must use in-text referencing to properly acknowledge the work of the original author. The preferred referencing style is the Harvard referencing style (author-date). However, you are not expected to reference the formulae.
Task 2 (Bond valuation)
A. Robertsons Ltd is planning to expand its specialty stores into five other states and
finance the expansion by issuing 15-year zero coupon bonds with a face value of
$1,000. If your opportunity cost is 8 percent and similar coupon-bearing bonds will
pay semiannually, what will be the price at which you will be willing to purchase
these bonds?
B. Jeremy Kohn is planning to invest in a 10-year bond that pays a 12 percent coupon.
The current market rate for similar bonds is 9 percent. Assume semiannual coupon
payments. What is the maximum price that should be paid for this bond? (3 marks)
C. Shawna Carter wants to invest her recent bonus in a four-year bond that pays a
coupon of 11 percent semiannually. The bonds are selling at $962.13 today. If she
buys this bond and holds it to maturity, what would be her yield? (3 marks)
D. Huan Zhang bought a $1,000 10-year bond that pays 8.25 percent semiannually for
$911.10. What is the yield to maturity on this bond? (3 marks)
E. Jorge Cabrera paid $980 for a 15-year bond 10 years ago. The bond pays a coupon of
10 percent semiannually. Today, the bond is priced at $1,054.36. If he sold the bond
today, what would be his realised yield?
Task 3 A. Priority Shift Ltd is expected to grow at a constant rate of 9 percent. If the company’s
next dividend is $2.75 and its current price is $37.35, what is the required rate of
return on this share?
B. Denyer & Grant Ltd., is a fast growth share and expects to grow at a rate of 25 percent
for the next four years. It then will settle to a constant-growth rate of 10 percent. The
first dividend will be paid out in year 3 and will be equal to $5.00. If the required rate
of return is 18 percent, what is the current price of the share? (4 marks)
C. Stag Company will pay dividends of $4.75, $5.25, $5.75, and $7 for the next four
years. Thereafter, the company expects its growth rate to be at a constant rate of 7
percent. If the required rate of return is 15 percent, what is the current market price of
the share?
D. The Burleigh Basin Surf Co. has issued perpetual preference shares with a $100 par
value. The company pays a quarterly dividend of $2.60 on this share. What is the
current price of this preference share given a required rate of return of 12.5 percent?
E. Each quarter, Transam Ltd pays a dividend on its perpetual preference share. Today,
the share is selling at $83.45. If the required rate of return for such shares is 10.5
percent, what is the quarterly dividend paid by this company?



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