Corporate Finance Bonds and Stocks

a) “Bond prices and interest rates must move in opposite directions.”
Evaluate this statement and, with the help of an example, justify whether this
statement is true.
(10 marks)

b) Consider the following three stocks:
 Stock A is expected to provide a dividend of $10 a share forever.
 Stock B is expected to provide a dividend of $5 next year and thereafter the
dividend will grow at 4% each year indefinitely.
 Stock C is expected to pay a dividend of $5 next year. Thereafter, dividend
growth is expected to be 20% a year for five years (i.e. until year 6) and zero
thereafter.
If the market capitalisation rate for each stock is 10%, which stock is the most
valuable?
(10 marks)
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