Q:Case Study 2

15 Marks

Ali has $9,000 to invest and is considering the following securities for his portfolio:

a.

Ordinary shares of Biotech Ltd that has recently paid a yearly dividend of $4.50 and the

company has forecasted an estimated dividend growth rate of 4% pa indefinitely. If Ali's

required rate of return is 15%, how much will he be prepared to pay for Biotech shares? (Sh

answer correct to the nearer cent.) If Ali invests all the funds to buy this share explain how n

shares Ali can buy.

b. A bond issued by DMO Ltd that has a face value of $1,000 and a coupon rate of 5% pa. Th

coupons are paid semi-annually and the bond has 10 years to maturity and 6.5% pa yield.

Calculate the price of the bond (show answer correct to the nearer cent). If Ali invests all the

funds to buy this bond explain how many bonds Ali can buy.