(a) State the circumstances under which it would be advantageous to lenders and to borrowers from the issue of:
(i) Debentures with a floating rate of interest. (4 marks)
(ii) Zero-coupon bonds. (4 marks)
(Ignore taxation)
(b) (i) Briefly discuss the disadvantages of the constant growth dividend model as a valuation model. (4 marks)
(ii) The dividend per share of Mavazi Limited as at 31 December 2000 was Sh.2.50. The company’s financial analyst has predicted that dividends would grow at 20% for five years after which growth would fall to a constant rate of 7%. The analyst has also projected a required rate of return of 10% for the equity market. Mavazi’s shares have a similar risk to the typical equity market.
Required:
The intrinsic value of shares of Mavazi Ltd. As at 31 December 2000.
(8 marks)
(Total: 20 marks)
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