You have a sustainable amount of money invested in three different unlisted financial securities. As these investments are not traded on the financial markets, they do not have an observable market price but you have ascertained the following information
• Company bonds: $1,000 face value (par) value with 6 years to maturity, paying 11% PA semi-annual coupons. Currently the yield on 6 year government bond is 6% PA and you think that a risk premium of 4% PA is appropriate.
• Preference shares: Irredeemable , paying 8% annually on $10 par value, and your estimate of the risk premium for the shares is 7% PA
• Ordinary shares: five years ago the annual dividend paid by the company was 12 cents per share and given this year's dividend of 18.5 cents you expect future dividends to grow at the same annual compound rate. From your analysis of the variability of the company earnings over the last 5 years you deem a reasonable estimate of the company market risk (beta) to be 1.7. Also, you know that the long-term historical average return from a market portfolio investment is 13% p.a.
Note: For the ordinary shares, assume that the reference in the question to -this year‘s dividend of 18.5 cents per share? refers to the current dividend to be paid immediately.
Required; On the basis of this information, estimate the current value of each security, showing calculations for all parts