Calculate the price of the preferred stock

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Suppose the financial manager of Vitol suggests either issuing bonds or shares to raise capital for the environmental-friendly development plan. Assuming there is no fees or costs for the securities.

Question (i) Suppose Vitol plans to issue bonds with $10,000 par value, 20 years of term to maturity, 12% coupon to be paid semi-annually, investors require 6% of return on the bond with similar risk. Calculate the price of the bonds.

Question (ii) Suppose Vitol's preferred stock is expected to pay a $1 dividend every year and the required return is 9%. Calculate the price of the preferred stock.

Question (iii) Suppose Vitol just paid a dividend of $0.5 a share. It is expected its dividend to be grown by 4% per year. If the market requires a return of 12%, calculate the fair value of the stock.

Question (iv) Why the require returns in the part (i) through (iii) are different even though the issuer is the same?

Reference no: EM132512133

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