Dividends are expected to grow at an annual rate of 5

Reference no: EM13613880

CASE:

Early in 2004, Mr. Zahid Hussain, the chief financial officer for SNT Manufacturing Company was given the task of assessing the firm's bond and stock values. To perform the necessary analysis,Mr. Zahid gathered the following relevant data on the firm's bonds and stocks.

BONDS: The firm has a Rs. 1,000 par value bond with an 8 percent coupon interest rate outstanding. The bond has 12 years remaining to its maturity date.

STOCKS: The firm's common stock currently pays an annual dividend of Rs. 1.80 per share. The required return on the common stock is 12 percent.

REQUIRED:

a.If interest is paid annually, what is the value of the bond when the required stated return is:

(1) 7 percent

(2) 8 percent

(3) 10 percent

B.Indicate for each case in part a whether the bond is selling at a discount, at a premium, or at its par value.

C.Using the 10 percent required return, find the bond's value when interest is paid semiannually

d. Estimate the value of common stock under each of the following dividend-growth-rate

Assumptions:

(1)Dividends are expected to grow at an annual rate of 0 percent to infinity.

(2)Dividends are expected to grow at a constant annual rate of 5 percent to infinity.

(3)Dividends are expected to grow at an annual rate of 5 percent for each of the next 3 years followed by a constant annual growth rate of 4 percent in years 4 to infinity.

Reference no: EM13613880

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