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Calculate the estimation of the expected current yield

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Reference no: EM133042192

Questions - Q1. A non-callable bond has another 14 years to maturity. It carries a 6.3% annual coupon, and a RM 1000 par value. An investor plans to buy and hold it for only four years. The required return of this investor is 5.2% per annum. The yield curve data indicates that the market expects that in four years, the yield to maturity on a 10-year bond with similar risk will be 6.7%.

a. Based on the available information, estimate the maximum bond price that this investor is willing to pay today.

b. Calculate the estimation of the expected current yield and capital gain of the bond in the first year based on the bond price calculated above.

Q2. A company has been growing at a fast rate of 35% per year recently and this growth rate is expected to last for another two years. Thereafter, the growth rate is expected to decline to a sustainable rate of 5%.

a. If the most recent dividend paid is RM1.20 and required rate of return is 12%, how much is the stock worth today?

b. Based on the calculation in (a), would you buy the share if the stock is selling at RM25 today? Is the share overvalued or undervalued?

c. Briefly discuss the limitations of Constant Growth Model in the valuation of stocks.

Reference no: EM133042192

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