Question 1
SSSG Ltd. has just issued a dividend of $1.25 per share on their ordinary shares that have a face value of $1.00. Dividends have been increasing at a rate of 4%pa and this trend is expected to continue for another year. After that the growth rate is expected to be 6%pa for three years before settling down into the long term growth rate of 5%pa. If the market requires a return of 12%pa on these shares:
i. What is their current price?
ii. What is the expected price five years from now?
(Please show workings for parts (i) and (ii).)
Question 2
Three years ago, Batlow Ltd. issued 10 year $1,000 bonds with a 7% coupon rate paid semi-annually, at par value. The market currently requires a 9% yield.
i. What was the price of the bond at issue?
ii. What is the current price of the bond?
iii. If the market yield falls to 6% in two years time, what will the bond's price be at that time?
iv. Explain your results in (i) - (iii).
(Please show workings for parts (i) to (iii).)
Question 3
i. 'If after all your calculations you tell me that there is a high probability that the share's price will vary between $4.50 and $9.60, I can make a fortune by buying the share at $4.50 and selling when it reaches $9.60.'
ii. 'I don't care how high the price may go, all that worries me is whether or not I will make a loss.'
iii. 'Expected return and standard deviation are of no interest to me, all I want to know is what my investment will be worth one year from now.'