Valuation
of Bonds and Equities**
- Tutorial 3
**

**Question
1. **

**Bubble Plc** plans to issue a
bond with 5
years to maturity. The Bubble bond has a coupon of £20.00 and the face
value of
£500.00. Similar bonds have yield to maturity 4%.

a.
What are the bond cash flows?

b. What would this bond sell for?

c. What is the relationship
between price of a bond and its YTM?

d. Explain why some bonds sell at
a premium over par value while other bonds sell at a discount. What do
you know
about the relationship between the coupon rate and the YTM for premium
bonds?
What about for discount bonds? For bonds selling at par value?

e. What is the relationship between the current yield and YTM
for premium bonds? For discount bonds? For selling at par value?

**Answer a.**

Bond Cash flows are the payments received (interest) annually by the Bond Holder the final such payment is paid together with the face value of the bond at maturity.

**Answer b.**

**Answer c.**

The yield to maturity
is the discount rate which
returns the market price of the bond**. **So it is an expression of all the
discounted coupons and the discounted Face Values at maturity

**Answer d.**

**Answer e.**

**Question
2. **** **

Oasis plc has just
paid a dividend of £6 per
share. The dividend of this company grows at a steady rate of 10 per cent per
year. Based on this information, what will the dividend be in five years?

**Question
3. **** **

Three companies are all in the same type of business.

ABC
Ltd expects to pay a dividend of £10.00
forever;

BCD Ltd expects to pay a dividend next year of £5.00 with
growth thereafter of 4%
per year;

CDE Ltd dividend expects to grow at 20%
for
the next 5 years. The dividend just paid was £5. After that, the
growth is
expected to be zero
percent forever.

**Question
4. **** **

Hathaway plc is a UK based manufacturing company. The company is all equity financed and recent dividend history of the company has shown a constant growth rate of 10% which is expected to continue for the foreseeable future. The dividend for 2011 was 6.0p per share.

Assume
a required rate of return of 13%.