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Present value of dividends during the rapid growth period

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Reference no: EM132616121

Question 1:

Trentham Estate Ltd expects to grow at a rate of 22 per cent for the next 5 years and then settle to a constant-growth rate of 6 per cent. The company's most recent dividend was $2.35. The required rate of return is 15 per cent.

Required

a. Find the present value of the dividends during the rapid growth period.

b. What is the price of the share at the end of year 5?

c. What is the price of the share today?

d. Briefly describe the factors that financial managers should consider when setting the dividend policies for their companies.

Question 2

New South Wales Treasury has issued $1,000 face value, 25-year bonds that pay a coupon of 9.875 per cent semi-annually. The current market rate for similar securities is 11 per cent.

Required

a. What is the bond's current market value?

b. What will be the bond's price if rates in the market (i) decrease to 9 per cent; (ii) increase to 12 per cent?

c. Discuss how the interest rate changes affect the price of premium bonds and discount bonds?

d. Suppose the bonds were to mature in 12 years. How would the interest rate changes in part b affect the bond prices?

Reference no: EM132616121

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