Question 2

1. Microsoft Inc. has just issued a 5-year, 10% coupon interest rate, $1,000-par bond that pays interest semiannually. The required return is currently 14%.

Required:

1. What is the market price for above bond? (3 marks)
2. What is the market value if required return decreases to 8%? (3 marks)
3. If you are expecting that the market interest rate will be 10% after year 3, how will bond value change? (2 marks)

2. Find the value of stocks for following companies:
   1. Minum Inc. just paid a dividend of $0.5 last year. The CEO of the company declared that the company will maintain a constant growth rate of 8% per year every year from now on. How much will you pay for the stock if your required return is 10%? (2 marks)
   2. Apple Inc. paid a dividend of $4 last year. It expects zero growth in the next year. In years 2 and 3, 6% growth is expected, and in year 4, 15% growth. In year 5 and thereafter, growth should be a constant 10% per year. Solve the maximum price per share that an investor who requires a return of 20% should pay for the common stock. (12 marks)

3. Discuss the advantage of cash flow discount model over dividend discount model in stock valuation. (3 marks)

[Total: 25 Marks]