Question 4A H&M is looking for financial investment in the securities market. Two investment options are available in different securities: Bonds and ordinary shares. ABC Corporate bond: the bond is paying 13% coupon rate. Interest is paid semi-annually. The bonds have a face value of $1,000 and will mature 12 years from now. XYZ ordinary share: The company Management plans to pay a dividend of $8.50 per share next year and estimated steady growth of 3% in dividends over the foreseeable future. The required rate of return for shares of this type is 15%. Required: Compute the current value of the ABC Corporate bond if the YTM of the bond is 11.5% annually

Bond valuation is the method of finding the fair value of the bond. Fair value means the present…

Answered: Compute the current value of the ABC…

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter11: The Cost Of Capital

Section: Chapter Questions

Problem 1PROB

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Question 4A

H&M is looking for financial investment in the securities market. Two investment options are available in different securities: Bonds and ordinary shares.

ABC Corporate bond: the bond is paying 13% coupon rate. Interest is paid semi-annually. The bonds have a face value of $1,000 and will mature 12 years from now.

XYZ ordinary share: The company Management plans to pay a dividend of $8.50 per share next year and estimated steady growth of 3% in dividends over the foreseeable future. The required rate of return for shares of this type is 15%.

Required:

Compute the current value of the ABC Corporate bond if the YTM of the bond is 11.5% annually

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