Bond surrogate-compare these exercises to annuity-perpetuity

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Reference no: EM13850711

Choice Properties REIT equity is a candidate for a “bond surrogate” because it pays a stable dividend supported by collecting rent on grocery stores.

a. What is the current dividend (per share) of Choice Properties REIT? How often do they pay?

b. Assuming the dividend never changes, set up a cash flow table for the perpetual dividend and discount the cash flows (back to June 2 again). How do you deal with infinity here? Find a discount rate to get the present value close to the current trading price. Compare to the “dividend yield”: annual dividend divided by price.

c. Reprogram your model to include a growth rate. Assume 3% growth (rent increases and development). What’s the discount rate to get close to the current trading price? Compare to the constant case.

d. Compare these exercises to the annuity, perpetuity and growing perpetuity in the textbook. Do the textbook formulas work?

e. Interest rate risk. Suppose the Fed raises rates more than expected and all discount rates jump by 1%. What’s the percentage price loss on?

i. The Ontario long bond

ii. The constant-dividend Choice REIT (g=0%)

iii. The growing Choice REIT (g=3%)

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