Principles of Financial Investments – Maple Plc has never paid a dividend, however it has just announced that it will pay an annual dividend

Question 1

Maple Plc has never paid a dividend, however it has just announced that it will pay an annual dividend of 5p next year, 8p the year after and 10p the year after that. From then on the firm expects dividends to grow at 4% per year.

Earnings per share next year will be 8p. The firm has 10 million shares currently in issue and beta of the firm’s shares is 1.5. The current riskless rate in the economy is 3% and the expected return on the stock market is 10%.

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a) Calculate the expected return (i.e. cost of capital) for equity holders in Maple Plc.
b) What will the plow back ratio of the firm be next year?
c) Calculate the current share price of the firm.
d) If an investor had bought the share for £1.50 twelve months ago, calculate the Total Shareholder Return (TSR) for the year.
e) An alternative way to value shares is using “relative valuations”. Explain in detail, with a numerical example, how this technique works

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Question 2

Exactly one year ago, Willow Plc issued 8 million 9% coupon bonds (each bond had a face value of £100) with a maturity of 6 years.
a) If the bonds was issued at a fair price and the yield to maturity on the bonds was 6.5%, how much did Willow Plc raise from the bond issue?

b) Today the bond price is quoted as £93.49.
i. What annual rate of return would you have made on the bond if you had bought it when it was issued
ii. What is the yield to maturity on the bond today?
iii. What is the duration of the bond today?

c) Explain what a credit rating is and why they are useful to investors. Your answer should include a discussion of default premiums.

 

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Principles of Financial Investments – Maple Plc has never paid a dividend, however it has just announced that it will pay an annual dividend