One Coin Crypto (OCC), currently has assets with a market value of $100. Next year the market value of OCC's assets is going to increase by 50% or decrease by 40% depending on the state of the economy. The annual risk-free rate of interest is 0%. OCC has one share of common stock issued and outstanding as well as one corporate bond outstanding with a face value of $100 and a coupon rate of 5% maturing next year at t=1. The corporate bond has no callable, puttable or convertible features. (a) Find today's value of OCC's corporate bond and common stock. What is the promised yield to maturity of the corporate bond equal to? (b) Now suppose that in addition to the 5% coupon we also make the corporate bond convertible (at the discretion of the bondholder) into 2 shares of common stock. In other words, the bondholder has the right but not the obligation to exchange their bond into 2 shares of common stock when the bond matures. What is today's value of OCC's convertible corporate bond and common stock? What is the promised yield to maturity (YTM)? How about the promised yield to conversion (YTC)? (c) Finally, how would the answers in part (b) change if the corporate bond were instead convertible into 9 shares of common stock?
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
One Coin Crypto (OCC), currently has assets with a market value of $100. Next year the market value of OCC's assets is going to increase by 50% or decrease by 40% depending on the state of the economy. The annual risk-free rate of interest is 0%. OCC has one share of common stock issued and outstanding as well as one corporate bond outstanding with a face value of $100 and a coupon rate of 5% maturing next year at t=1. The corporate bond has no callable, puttable or convertible features.
(a) Find today's value of OCC's corporate bond and common stock. What is the promised yield to maturity of the corporate bond equal to?
(b) Now suppose that in addition to the 5% coupon we also make the corporate bond convertible (at the discretion of the bondholder) into 2 shares of common stock. In other words, the bondholder has the right but not the obligation to exchange their bond into 2 shares of common stock when the bond matures. What is today's value of OCC's convertible corporate bond and common stock? What is the promised yield to maturity (YTM)? How about the promised yield to conversion (YTC)?
(c) Finally, how would the answers in part (b) change if the corporate bond were instead convertible into 9 shares of common stock?
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