A fund manager is required to submit an investment proposal to the Investment Committee on 
the merits of investing in ABC Corp. As an investment analyst supporting the team, you have 
been asked to assist in analysing the bonds and common stock of the company. 

You have found the company to have a target capital structure of 70% equity and 30% debt, 
and gathered the following information: 

Current price of bonds                                   97% of par 
Bonds par value                                              $1000
Coupon rate                                                     8% 
Earnings per share- most recent year          $2.00 
Expected growth rate of dividends               5.10% 
Dividend payout ratio                                     60% 
Required rate of return                                 12.60% 
Current price of common stock                   $18 

(a) The bonds were issued 10 years ago, and mature 15 years from today. Coupon payments 
are distributed annually. Analyse the YTM of the bonds (including the verification of 
your answer with an appropriate Excel function), and the circumstances where bonds 
will be trading at discount, premium or at par. 

(b) Calculate the company's share price using the Dividend Discount Model, and determine 
whether it is worth investing at current price. 

(c) Compose a memo to the fund manager, of not more than 500 words, about your 
findings on the bond and common stock of ABC Corp, and provide your opinion on the 
relative merits of investing in bond vs common stock.  

Answer rating: 100% (QA)

a To analyze the Yield to Maturity YTM of the bonds we can use the following formula YTM C F P N F P 2 Where YTM is the yield to maturity C is the coupon payment F is the face value or par value of th... View the full answer