QUESTION 1

The Tanzanian Government issued perpetual bonds in 2010 with a coupon rate of 3% and
face value of Tzs100. Calculate the price of such a bond in 2022 when the riskless interest
rate in Tanzania is 4.85%.
With a 3% coupon, the £100 bond will pay £3 in interest annually forever. Put C = 3 and r =
.0485
B = C/r
= 3/.0485
= £61.86
QUESTION 2
You have bought a zero-coupon bond for $500. It will mature in 6 years and pay the face
value of $100,000. Assuming annual compounding, what is the implied rate of return for the
bond?
100,000 = 500(1 + r)6
Or, 1 + r = (100,000/500)1/6 =
r=
QUESTION 3
NOBLE BUSINESS SOLUTION has Tzs 1000 bonds, with current yield 12%, will mature
after 10 years. The coupon rate of these bonds is 10%. Calculate their market price and the
yield to maturity.
By definition, the current yield of the bond is equal to the annual interest payment from the
bond, divided by the market value of the bond. Write it as
Current yield = Annual interest payment from the bond/Market price of the bond
0.12 = 100/B
B = Tzs833.33

QUESTION 4
You believe that there is a 30% probability that the dividend paid by IBM next year is going
to be $4.50, and a 70% probability that the dividend will increase to $5.00. You also feel that
IBM will grow at the rate of 8% for the long term. Your required rate of return for IBM stock
is 12%. How much should you pay for a share of IBM?
E(D1) = 0.3(4.50) + 0.7(5.00) = $4.85.
P = D1 / r − g
P = 4.85.12 − .08
= $121.25

QUESTION 5
Suppose a firm is expected to increase dividends by 20% in one year and by 15% in two
years. After that dividends will increase at a rate of 5% per year indefinitely. If the last
dividend was Rs. 1.00 and the required return is 20%, what is the price of the stock?
QUESTION 6
A public listed company, Rigeco has just paid a dividend of $ 1.5 per share. The dividends
are expected to increase by 20% per annum for the next 3 years followed by a 10% growth
for the next 2 years, before it stabilizes at 4% per annum.
Using a cost of equity of 12%. Calculate Ridgeco intrinsic value using the dividend discount
model
QUESTION 7
Determine the present value of a 10 years Bond payable with a face value of $100,000 and
stated interest rate of 8%, paid semiannually. The market rate issuance is 10%.

QN. 8
Palmgor Capital’s shareholders require a minimum return of 18%. The company last paid out
a dividend of R6 per share, which is expected to increase by 12% per annum
Qsn 9
BEF shares are currently trading at R75 per share. The company last paid put a dividend of
R6 per share, which is expected to increase by 10% per annum.
Required: What is the cost of equity (required rate of return)?