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Your company is considering diversifying its investment in financial securities into both stocks and bonds.
Your company is considering diversifying its investment in financial securities into both stocks and bonds. You are asked to evaluate the following alternatives and make your recommendations as to the securities that your company should select.
Bonds:
There are several bonds traded in the market. Assuming that they are all in the same risk class, and you believed that a 9 percent rate of return should be required. The following bonds are those that you feel worth considering:
• Bond ABC, selling in the market at RM700, has a RM1,000 par value, pays a half-yearly coupon at annual rate of 7 percent, and is scheduled to mature in 20 years.
• Bond PQR is a perpetual bond with a face value of RM1000 and a 7 percent coupon rate. The bond, which is selling at RM500 now, pays interest to its investors at the end of every quarter.
• Bond XYZ is a zero-coupon bond with a face value of RM1,000. Currently priced at RM400, this bond will mature in 10 years.
Common stocks:
You are considering the common shares of the three companies that you have identified to work with. The market's required rate of return on common equity is 15 percent. More information on each share is as below:
• Alpha Berhad is selling at RM15 per share. You expect the company will be experiencing a period of rapid growth of 12 percent per year for the next two years and then slow down to a constant growth of 5 percent per year due to competitors entering the market. The most recent annual dividend paid by Alpha was RM1.50.
• Beta Industries Berhad is a newly listed company and its current market price is RM5 per share. During a press conference in conjunction with its debut on the Bursa Malaysia, the Chairman announced that Beta Industries will only pay its first dividend three years from now to enable the company to cope with the capital requirements to support growth. This expected dividend of RM0.30 per share will remain constant for four years, and after that will grow at a rate of 5 percent forever.
• Gamma Corporation Berhad is an established public company that has been in the bourse for more than two decades. Gamma Corporation has been paying fixed dividends of RM2 to their shareholders for a long time and it seems that there is no indication that they are going to raise it. The current price of Gamma common share is RM10 per share.
1. Calculate the value of all the securities that have been shortlisted above.
2. What are the securities that you would select into your portfolio? Why?
1ABCInterestrateNPVPV of 2200Bond PriceSelling for 350.04540$644.06171.9287$815.98$700 PQRrateinterestrequire rateValueSelling Price 0.017517.50.0225$ 777.78$ 500.00 XYZ...