If the amount of the dividends were to increase at the end of the year the common stock molten would increase. Fifth required rate tot return increased the current share price of common stock would decrease, As the stock price increases, the risk becomes higher for investors but they would be willing to pay for the higher price because there is also an expectation that there will be a higher return in dividends. An increase in dividends would make stock higher as investors will see that the stock pays good dividends and they Avail be willing to pay good money in return for a good payout. Task 3
Annual rate: 7. 50% Current price of bond: $1,062 Term: 20 years Par value $1,000 Annual Interest: 37500 Semi Annual Interest: $37. 50 $1,062 = $37. 50 x 1 – (1 4 YET,’2) divided by WITTY 1000/1 -e 6. 92% A coupon rate is generally fixed and is known as the stated rate off bond that determines the periodic interest payments. The annual coupon divided by the face value is called the coupon rate of the bond. The VT M rate would be the rate of return the investor would earn or the required rate of return of interest fifth bond was purchased at its current market price and held to maturity.
The VT M is also known as the bond yield. This is also the discount rate that is equal to the discounted value of the bond’s future cash flows to its current market price, Certain factors can contribute to the rockiness of bonds such as interest risk and credit risk. The interest risk is resulting from fluctuating interest rates Which poses a risk for bondholders because the return they get from the bonds are affected by the sensitivity Of the price Of bonds to any changes to the interest rate. Credit risk of bonds has a possibility that the bond issuer will default on the bond.
The risk that the bond issuer Will default on the bond Will mean that the investors actual yield will be lower. Other factors that can contribute to the rockiness of bonds are inflation rates and the financial health of the bond issuer. Some positive covenants Airiest could use in future bond issues is maintain a minimum level of net working capital, maintain any and all collateral or security related to the bond indenture as well as all facilities in good working condition. They also must file quarterly audited financial statements and make sure bondholders have access to this information.
They must maintain a certain level of debt coverage ratio as well as allow tort redemption in the event of a merger or sale, Some negative covenants that Airiest can have in their future bond issues could be debt limitation, limitation on liens or mergers, consolidations or sales, dividend limitation, or limitations on asset disposal They cannot pay unusually high dividends and must limit those dividends to a certain amount, they cannot lease or sell off major assets without the approval of the lender, they cannot issue additional debt and they cannot pledge any assets to lenders.
