Reference no: EM133036591

Question 1 -  A. Elvira Bhd is a company specializing in the production of rubber products. The share price of the company is at RM43.50 per share. Recently, Elvira paid a dividend of RM4.00 per share and the company expects that the dividend will stay constant for another 3 years. Shasha is considering an investment in Elvira Bhd and seek your opinion on the action she should consider.

If the rate of return on similar investment is 10%, propose the actions to be taken by Shasha if:

i) after the third year, the dividend decreases to RM 3.00 until indefinite future.

ii) after the third year, the dividend grows at 5% for two years and later grows at 1% per year indefinitely.

Question 2 - A. Ten years ago, Rossie Bhd had issued RM1,000 par value, 8% convertible bonds with a maturity period of 15 years. The convertible bond gives the holders the right to convert their bonds at a specified future date into new equity shares of the company. However, the bond may also be callable at any time after 3 years with a call penalty of two years interest being payable. If the bond is converted, the conversion price is RM25.

Rossie Bhd is paying an annual constant dividend of RM1.25 per share on its ordinary share. Currently, the shareholders of Rossie Bhd requires a rate of return at 10% per annum whilst the current market rate of a similar bond yielding 12% per annum.

Required -

i) Determine the minimum value of the bond. Explain your answer.

ii) Justify whether Rossie Bhd would call the above bonds.

iii) What action should you suggest Rosie Bhd consider if the market interest rates fall by 4%. No calculation is required.

iv) Propose two (2) benefits of issuing convertible bonds from the issuer's perspective?