a) Outstanding bonds at Rolls Royce Inc. carry a rating of AA3. Discuss in detail (a) the factors that determine a bond's rating and (b) the relationship between a bond's rating and investors' required rate of return.
a) Outstanding bonds at Rolls Royce Inc. carry a rating of AA3. Discuss in detail (a) the factors that determine a bond's rating and (b) the relationship between a bond's rating and investors' required rate of return.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:a) Outstanding bonds at Rolls Royce Inc. carry a rating of AA3. Discuss in detail (a) the
factors that determine a bond's rating and (b) the relationship between a bond's rating
and investors' required rate of return.
b) Maddy Co is a public limited company which has managed to increase earnings over
the last year. As a result, the board of directors has increased the dividend payout
ratio. The last dividend paid by Maddy Co. was £1.50. The dividend growth rate is
expected to be constant at 15% for 3 years, after which dividends are expected to grow
at a rate of 6% forever. If the firm's required return (rs) is 11%, what is its current stock
price?
c) Which of the following shares are over-valued? Draw the Security Market Line.
Current rate of
Beta
return
A
0.5
6%
B
1.2
12%
0.8
8%
The risk-free rate is 5% and the return on the market index is 10%.
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