FINC5001 FOUNDATION IN FINANCE
TOPIC 4 - DEBT AND EQUITY VALUATION
PRE-WORKSHOP QUESTIONS
Pre-workshop self-access questions set is designed for you to self-access your understanding of the lecture content. You are expected to complete these questions prior to the workshop. These questions will not be discussed in the workshop.
Pre-Q1
David Jones’ is considering issuing bonds with ten years to maturity to match the expected life of its store transformation plans. The bonds would have a face value of $1,000 and an annual coupon of $80. Similar bonds currently trade at a YTM of 8% p.a. compounded annually.
Calculate the expected issue price of a David Jones’ bond. Is this trading at par, at a premium or at a discount? What would be the price if the annual coupon was set at $60 instead? Or $100 instead?
Pre-Q2
Estimate the value of the following shares:
a) A share in a corporation that has been paying a semi-annual dividend of $0.40 in recent years, has no growth in earnings and that has a level ofrisk requiring a return on equity of 12.50% p.a. compounding annually.
b) A share that has just paid an annual dividend of $1.35, with a dividend growth rate of 2% p.a. expected in perpetuity and a required rate of return of 13% p.a.
c) A share issued by a company with current earnings of $2 per share. These earnings are expected to grow at 4% p.a. forever but only 30% of earnings are paid out as annual dividends. Their cost of equity is 12% p.a. compounding semi-annually.
d) A share in a company whose ROE and payout ratio is expected to remain constant at 8% p.a. and 60% respectively forever. The required return on equity is also 8% p.a. annually compounded. The next annual dividend is expected to be $0.75 per share.