Question 13

Discuss if the following comment is true or false:

When deciding the coupon rate of a new issue (of fixed rate bonds), the company should always set the

coupon rate to be less than the market interest rate. By doing that, the company will pay less interest

every period.

Question 14

Paddy Field Limited has just paid a dividend of $1.50. Due to the current financial difficulties, Paddy

Field will not be paying any dividend for the next year. Paddy Field is expected to resume paying an

annual dividend of $1 in year 2 and this dividend is expected to increase by 6 percent annually thereafter.

What is the value of this stock in three years if the required return is 15 percent?