ABC company has the following 3 securities trading on the market. These are the only securities that finance ABCs operation:
1) 5 year, semi-annual bond with a 5% coupon rate selling at $988
2) A preferred share with a 7% dividend and a market price of $23
3) A common stock which recently paid a $3 dividend
ABC’s common stock dividend is expected to grow at 4% forever. The current common stock’s market price is $52.
A) Find the required rate of return for the 3 securities (bond, preferred share and common stock)
B) If ABC has 1000 bonds outstanding, what is the total value of all the bonds?
C) If ABC has 100,000 preferred shares outstanding, what is the total value of the preferred shares?
D) If ABC has 1,000,000 common shares outstanding what is the total value of the common shares
E) What is the total value of the company (bonds plus preferred shares plus common shares)
F) Give 2 reasons why the common shares have a greater required rate of return than the bonds