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What is the expected price of the common share

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a) The Chief Financial Officer ("CFO") of a local listing company wants to raise fund for the company by issuing bond. It is an 8-year bond with face value of $1,000. The annual coupon rate is 10% p.a. which will be paid semi-annually. Required rate (discount rate) of investor on the bond with similar risk is 12% per annum. Assume there is no fees or costs for bond issue, calculate the cash proceeds from the bond issuance. Besides, if the market price of the bond is $800, would you consider to purchase the bond? Explain.

b) The CFO also considers issuing additional common share for fund raising. The common share has $40 par value per share and the expected dividend yield is 6% per annum. The CFO assumes the company earnings will grow at 3% p.a. constantly. What is the expected price of the common share if the discount rate is also 10% per annum?

c) If you are holding the common share and the market price is $40, what would be the market expected dividend growth rate? Should you buy or sell of the common share? Explain.

Reference no: EM132860962

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