Niklaas Limited has a three-component capital structure:
• It has a 10-year 5% bond that pays interest annually (par value of $100). The current yield on a 10-year riskless bond is 4%, and the credit risk of Niklaas is such that investors demand a yield to maturity on Niklaas bonds of 2% over the riskless rate.
• The company also has a perpetual preference share paying an annual dividend of
N$10. For the preference share, investors demand a yield of 3% over the 30-year
riskless rate (considering that preference shares commonly have a perpetual term,
and the 30-year bond rate is commonly the longest maturing bond availableL which
• It also has an ordinary share that will pay a dividend of N$1 per share in the coming
year. Niklaas Limited has a beta of 0.8 and the market premium of 14%. Niklaas’ s
ordinary dividend is expected to grow by 7% in perpetuity.
(a) Calculate the bond price. (3 marks)
(b) Calculate the accrued interest and the price + accrued interest. Assume the next
interest payment occurs in 9 months. (3 marks)
(c) Calculate the price of the preference share (remember it is a perpetual instrument).
(d) Using the Dividend Discount Model, calculate the ordinary share price. (3 marks)
(e) Finally, in a brief discussion, analyze the reliability of the dividend discount model, specifically identifying those situations in which the results may be misleading, or the model is not applicable.
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