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Question 1: You are trying to value "A2M" share today (End of June 2019). Assume the current price of the share in the stock market is $17.15 and that you would like to hold the investment for 4 years. Assume that "A2M" will pay its first dividend ($0.5 AUD) one year from now. The total dividend will be paid as a lump sum (at once). After this you also estimate that the dividends will grow respectively at 30%, 25% per year. After that (starting in time 3) you estimate dividends will grow at a constant rate of 5% forever. Assume that today the Australian treasury notes is 1.5%, the market risk premium is 10% and the beta of "A2M" is 0.8. Based on this price would you purchase the share? Why or why not?
Question 2: "A2M" wants to reduce its weighted average cost of capital by replacing some of its equity with long-term debt. Assume that "A2M" would like to raise $200 million with a new issuing of bonds. Assume that the issue will have a coupon rate of 3% with a 5 year maturity. Assume this are semi-annual coupon bonds and each have a face value of $1.000 and the required rates of return for similar bonds in the market is 4%. What would be the issuing price of these bonds? How many bonds does the company have to sell in order to achieve its target?
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