FIN 1011 Saudi Electronic University Cash Inflows and Coupon Payment Questions

Assignment Question(s):(Marks 5)

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Q1. ABC company is issuing eight-year bonds with a coupon rate of 6.5 percent and semiannual coupon payments. If the current market rate for similar bonds is 8 percent, what will be the bond price? If the company wants to raise $1.25 million, how many bonds does the firm have to sell? (1 mark)

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Ans:

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Q2. You are interested in purchasing the common stock of Inch, Inc., which is currently priced at $ 40. The company is expected to pay a dividend of $3 next year and to grow at a constant rate of 8 percent.

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• What should the market value of the stock be if the required rate of return is 15.75 percent? (1mark)
• Is this a good buy? Why or why not? (1mark)

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Ans

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Q3. Raneem owns shares in HP Inc. Currently, the market price of the stock is $36.34. Management expects dividends to grow at a constant rate of 6 percent for the foreseeable future. Its last dividend was $3.25. Raneem’s required rate of return for such stocks is 16 percent. She wants to find out whether she should sell his shares or add to her holdings.

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• What is the value of this stock? (1 Mark)

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1. Based on your answer above, should Raneem buy additional shares in Honda Inc.? Why or why not? (1 Mark)

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Q4 )

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Discuss the idea of diversification in investments and how can Saudi Arabia’s economy benefit from this concept?

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NOTE:

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• Be sure to respond to at least two of your classmates.
• Support your answers with valid references.