CIT plc has an outstanding issue of £1,000-par-value bonds issued 5 years ago with a 12% coupon interest rate. The issue has initial maturity of 20 years and pays interest semiannually. i) What is the value of each CIT plc bond if bonds of similar risk are currently earning a ten percent rate of return. ii) If you are offered an opportunity to invest in these CIT plc bonds at the current market price of £1,190 per bond, should you accept this offer? Explain why.
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
- a) CIT plc has an outstanding issue of £1,000-par-
value bonds issued 5 years ago with a 12% coupon interest rate. The issue has initial maturity of 20 years and pays interest semiannually.
- i) What is the value of each CIT plc bond if bonds of similar risk are currently earning a ten percent
rate of return .
- ii) If you are offered an opportunity to invest in these CIT plc bonds at the current market price of £1,190 per bond, should you accept this offer? Explain why.
- b) ABC plc has paid the following dividends over the past seven years:
|
Year |
Dividend per share |
|
2014 |
£2.35 |
|
2013 |
£2.28 |
|
2012 |
£2.10 |
|
2011 |
£1.95 |
|
2010 |
£1.82 |
|
2009 |
£1.80 |
|
2008 2007 |
£1.73 £1.61 |
- i) Based on the information provided above, apply
Gordon’s growth model to compute thedividend growth rate.
- ii) If you can earn 13% percent on similar-risk investments, what is the most you would be willing to pay per share?
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