a$)$ Duffet Corporation has a $$1000$ par value bond with a $6\mathrm{.}5\%$ coupon rate.

The bond matures in $20$ years. Suppose coupons are paid annually.

The required return is $9\%.$ Compute the value of the bond.

$(6$ marks$)$

b$)$ BuzzMart Inc. issued a $30-$year, $7\%$ coupon interest rate, $$1000$ par value

bond that pays interest semi$-$annually. The required return is currently $6\%.$

Compute the value of the bond. $(6$ marks$)$

c$)$ Tsuz Industries has paid a dividend of $$3\mathrm{.}50$ per share for the past year $($D$0$

$=$ $$3\mathrm{.}50).$ The Chief Finance Officer expects the dividend to grow at a rate

of $5\%$ per annum for the foreseeable future. Assume investors require a rate

of return of $12\%.$

$($i$)$ Calculate the current price of the stock. $(2$ marks$)$

$($ii$)$ If the stock currently trades at $$53,$ would you buy it$?(1$ mark$)$

d$)$ Rainbow Airways is in the $40\%$ tax bracket. Information on the company$$s

debt, preferred stock and common stock are as follows:

Debt The company can issue bonds at a yield to

maturity of $8\mathrm{.}25\%.$

Preferred Stock The company can sell $9\%$ preferred stock at its

$$55$ per share par$-$value. Floatation costs are $$5$

per share.

Common Stock Price per share is currently $$50.$ Dividends are

projected at $$4$ per share next year with a dividend

growth rate of $5\%.$ There are no floatation costs.

$($i$)$ Calculate the cost of debt. $(2$ marks$)$

$($ii$)$ Calculate the cost of preferred stock. $(2$ marks$)$

$($iii$)$ Calculate the cost of common stock. $(2$ marks$)$

$($iv$)$ Rainbow Airways$$ capital structure is $20\%$ debt, $40\%$ preferred stock

and $40\%$ common stock. Calculate the weighted average cost of

capital $($WACC$).(4$ marks$)$