(a) You are evaluating two similar bonds. Both mature in four years, both have a K1,000 par value, and both pay a coupon rate of 10 percent. However, one bond pays that coupon in annual installments, whereas the other makes semiannual payments. Suppose you require a 10 percent return on either bond. Should these bonds sell at identical prices or should one be worth more than the other? What prices do you obtain for these bonds? Can you explain the apparent paradox?
(b) Drake Electricity sells electricity throughout the Northwestern Province. Because of increased mining activities in recent years, the company has prospered and expects to continue to do well in the near term. The company will pay a K0.75 per-share dividend to investors one year from now. Investors believe that Drake Electricity will increase that dividend at 15 percent per year for the subsequent five years, before settling down to a long-run dividend growth rate of 3 percent. Investors expect an 8 percent return on Drake Electricity common shares. What is the current selling price of the stock?