Taiwan Semiconductor Manufacturing Company, Limited (TSMC) was founded in 1987 in Taiwan. It is listed on the New York Stock Exchange (NYSE: TSM). TSMC is the world's most valuable semiconductor company. TSMC makes microchips for customers with process nodes from 2 microns to 7 nanometers. Recently, the company attracts media attention as U.S. tighter export controls among crucial chip supplies.

(a) Due to the potential negative economic impact of the pandemic, you and your friend have different estimates on TSMC's dividend payment.

Estimate A

You estimate that TSMC's dividend payment will be immediately down to $0 this year (year 0) and the next two years. But TSMC will resume dividend payment and pay a dividend of $0.50 per share 3 years from today, then to increase the dividend payment at a rapid rate of 35% in year 4 and a rate of 65% in year 5. You believe that the increase of dividend will then become constant at 10.50% from year 6.

Estimate B

Your friend also predicts that the dividend payment will be immediately reduced to $0 this year (year 0). However, she thinks that the company will resume dividend payment of $0.50 per share next year. However, the dividend growth will become negative in the following two years, i.e., -5% in year 2 and -15% in year 3, respectively. In years 4 and 5, your friend expects the dividend growth to be 35% and 65%, respectively, and to be 10.50% from year 6.

You and your friend observed that the U.S. Federal Reserve cut the benchmark interest rate to 0% in response to the coronavirus. Both of you find that the nominal risk-free rate declines to 0.85% while the market return is 3.75%. The beta of TSMC is 4.25.

(b) Now, suppose TSMC issues a 10% annual coupon bond that currently sells for $925.26. The par value of the bond is $1,000. The bond price will increase to $928.28 in the next year. Assume that YTM does not change from year 0 to year 1. Please find the current yield and the capital gain yield of the bond and determine the YTM of the bond.