8/Agarwal Technologies was founded 10 years ago. It has been profitable for the

Question

8/Agarwal Technologies was founded 10 years ago. It has been profitable for the last 5 years, but it has needed all of its earnings to support growth and thus has never paid a dividend. Management has indicated that it plans to pay a $0.25 dividend 3 years from today, then to increase it at a relatively rapid rate for 2 years, and then to increase it at a constant rate of 8.00% thereafter. Management's forecast of the future dividend stream, along with the forecasted rowth rates, is shown below. Assuming a required return of 11.00%, what is your estimate of the stock's current value? (5 marks) 9/ Cosmic Communications Inc. is planning two new issues of 25-year bonds. Bond Par will be sold at its $1,000 par value, and it will have a 10% semiannual coupon. Bond OID will be an Original Issue Discount bond, and it will also have 25-year maturity and a $1,000 par value, but its semiannual coupon will be onl 6.25%. If both bonds are to provide investors with the same effective yield, how many of the OID bonds must Cosmic issue to raise $3,000,000? round your fina answer up to a whole number of bonds. (4 marks)

Explanation / Answer

Francis

4 Nachman Year Cash Flow in the form of Dividends PV F @ 9%Req.Ret. PV @ 9% 0 1.32 1 1.32*1.3 = 1.716 0.91743 1.57431 2 1.32*1.3*1.1= 1.8876 0.84168 1.588755 2 1.8876*1.05/(0.09-0.05)= 49.5495 0.84168 41.70482 D3/(Reqd.Ret.-Growth Rate) Best Estimate of the Stock's Current Market Value   = 44.86789 $ 44.87

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