Sun System Incorporated is issuing 20-year $1 000 face value 10% annual coupon bonds to finance its operations over the medium to long-term.

i. If interest is paid annually, what is the value of the firms bond when the required rate of return is 8% and 12%? (4 marks)

ii. Indicate, for each case at i. above, whether the bond is selling at a discount or at a premium. (2 marks)

iii. If the bond pays interest at 8% semi-annually, what would be the current price of the bond? (2 marks)

iv. If bonds are sold for $850, what will be the approximate yield to maturity of the bonds? What is the effective annual yield on the bonds? (3 marks)

B. Welders Limited has just paid a cash dividend of $4.00 per share. The required return on the stock is 12%. If the dividend is expected to grow at a constant rate of 8% per annum:

i. calculate the current value of the stock. (2 marks)

ii. determine what the stock will be worth in five years. (3 marks)

C. What is the stock price today if the dividend is expected to grow at 15% per year for the next three years and then settle at 8% per year indefinitely?