Middleton Expects to Buy a 9.5% Coupon, 15 years Bond Today When It is First Issued by Alex PLC: Accounting Assignment, CSU, Australia

University Charles Sturt University (CSU) Australia
Subject Accounting

Question 1:

a. Middleton expects to buy a 9.5% coupon, 15 years bond today when it is first issued by Alex PLC. If interest rates suddenly rise to 12.5%, what happens to the value of Middleton’s bond? Why? (Word limit 20 – 30 words)

b. A corporate bond has a face value of $1 000, a coupon rate of interest of 10.5% per annum, payable semi-annually, and 20 years remaining to maturity. The market interest rate for bonds of similar risk and maturity is currently 8.5% per annum.

Required:

  1. What is the coupon payment of the bond?
  2. What is the present value of the bond?
  3. If the coupon payment is payable annual (based on the same information), what is the value of the bond?

Question 2:

a. Briefly discuss the relationship between the following: (Word limit 50-70 words)

  1. Share price and investors required rate of return
  2. Share price and dividend growth rate.

b. Otama LTD has an issue of preference shares outstanding that pays a $2.85 dividend every year. If this issue currently sells for $77.32 per share, what is the required return?

c. Price Tigers LTD expects to pay a $3.25 per share dividend next year. The company pledges to increase its dividend by 5.1% per year, indefinitely. If you require a return of 11% on your investment, how much will you pay for the company’s share?

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Question 3:

The cash flows shown below were extracted from the accounts of Jason Taylor, a music shop owner.

The cash flows shown below were extracted

  1. Prepare a statement of cash flows using the direct method.
  2. Outline some cash flow warning signals.

Question 4:

Selected information for two companies competing in the catering industry is presented in the table below:

Selected information for two companies competing in the catering industry

Required:

a. Calculate the following ratios for Lawson and Dawson:

  1. Current ratio.
  2. Return on Assets (ROA).
  3. Return on Equity (ROE).

b. From your calculations in Part (a), explain which entity is in a more favorable position.

c. Discuss two limitations of ratio analysis as a fundamental analysis tool.

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