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FM

© All Rights Reserved

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1.

P =

t=1

11

100

+

(1.15)t

(1.15)5

= Rs.11 x 3.352 + Rs.100 x 0.497

= Rs.86.7

2.(i)

7

12

100

P =

+

t=1

(1.14) t (1.14)7

= Rs.12 x PVIFA (14%, 7 years) + Rs.100 x PVIF (14%, 7 years)

= Rs.12 x 4.288 + Rs.100 x 0.4

= Rs.91.46

(ii)

7

12

100

P =

+

= Rs.100

t

7

t=1

(1.12)

(1.12)

Note that when the discount rate and the coupon rate are the same the value is

to par value.

3.

equal

The yield to maturity is the value of r that satisfies the following equality.

7 120

1,000

Rs.750 =

+

t

t=1 (1+r)

(1+r)7

Try r = 18%. The right hand side (RHS) of the above equation is:

Rs.120 x PVIFA (18%, 7 years) + Rs.1,000 x PVIF (18%, 7 years)

=

Rs.120 x 3.812 + Rs.1,000 x 0.314

=

Rs.771.44

Try r = 20%. The right hand side (RHS) of the above equation is:

Rs.120 x PVIFA (20%, 7 years) + Rs.1,000 x PVIF (20%, 7 years)

= Rs.120 x 3.605 + Rs.1,000 x 0.279

= Rs.711.60

Thus the value of r at which the RHS becomes equal to Rs.750 lies between 18% and

20%.

771.44 750.00

Yield to maturity = 18% + 771.44 711.60

x 2%

= 18.7%

4.

80 =

10 14

100

+

t=1 (1+r) t

(1+r)10

Rs.14 x PVIFA (18%, 10 years) + Rs.100 x PVIF (18%, 10 years)

=

Rs.14 x 4.494 + Rs.100 x 0.191 = Rs.82

Try r = 20%. The RHS of the above equation is

Rs.14 x PVIFA(20%, 10 years) + Rs.100 x PVIF (20%, 10 years)

= Rs.14 x 4.193 + Rs.100 x 0.162

= Rs.74.9

Using interpolation in the range 18% and 20% we get:

Yield to maturity

82 - 80

= 18% + ----------- x 2%

82 74.9

= 18.56%

4.

P =

12

t=1

100

+

(1.08) t

(1.08)12

= Rs.6 x 7.536 + Rs.100 x 0.397

= Rs.84.92

5.

Bond A

Bond B

Post-tax interest (C )

12(1 0.3)

=Rs.8.4

=Rs.97

10 (1 0.3)

=Rs.7

100 [ (100 60)x 0.1]

=Rs.96

The post-tax YTM, using the approximate YTM formula is calculated below

Bond A :

Post-tax YTM =

=

Bond B :

Post-tax YTM =

=

8.4 + (97-70)/10

-------------------0.6 x 70 + 0.4 x 97

13.73%

7 + (96 60)/6

---------------------0.6x 60 + 0.4 x 96

17. 47%

6.

P =

14

t=1

100

+

(1.08) t

(1.08)14

= Rs.6 x 8.244 + Rs.100 x 0.341

= Rs.83.56

7.

Po = D1 / (r g) = Do (1 + g) / (r g)

=

=

Rs.35.33

Since the growth rate of 6% applies to dividends as well as market price, the market

price at the end of the 2nd year will be:

9.

P2

=

=

Rs.39.70

Po

=

=

D1 / (r g)

=

Do (1 + g) / (r g)

Rs.12.00 (1.10) / (0.15 0.10)

=

Rs.264

10.

11.

Po

D1 / (r g)

Rs.32 =

g

=

Rs.2 / (0.12 g)

0.0575 or 5.75%

Po

Do

So

8

D1/ (r g) = Do(1+g) / (r g)

Rs.1.50, g = -0.04, Po = Rs.8

=

=

12.

The market price per share of Commonwealth Corporation will be the sum of three

components:

A:

B:

C:

Present value of the dividend stream for the next 4 years

Present value of the market price expected at the end of 8 years.

A=

+ 1.50 (1.12)4 / (1.14)4

=

=

B=

Rs.5.74

+ 2.36 (1.08)4 / (1.14)8

=

=

Rs.4.89

P8 / (1.14)8

P8 = D9 / (r g) =

So

C

Thus,

Po

=

=

13.

A + B + C = 5.74 + 4.89 + 13.14

Rs.23.77

Let us assume a required rate of return of 12 percent. The intrinsic value of the equity

share will be the sum of three components:

A:

Present value of the dividend stream for the first 5 years when the

growth rate expected is 15%.

B:

Present value of the dividend stream for the next 5 years when the

growth rate is expected to be 10%.

C:

A=

------------- + ------------- +-------------- + ------------- + ------------(1.12)

(1.12)2

(1.1.2)3

(1.1.2)4

(1.12)5

=

=

Rs.10.84

B=

------------ + ---------------- + ------------- + --------------- + --------------(1.12)6

(1.12)7

(1.12)8

(1..12)9 (1.12)10

4.42

--------(1.12)6

Rs.10.81

C=

=

4.86

5.35

5.89

6.48

+ -------------- + --------------- + ------------- + ------------(1.12)7

(1.12)8

(1.1.2)9 (1.12)10

D11

1

6.48 (1.05)

-------- x --------------- = ------------------- x 1/(1.12)10

rg

(1 +r)10

0.12 0.05

Rs.97.20

=

10.84 + 10.81 + 97.20 =

Rs.118.85

14.

=

140 x FVIFA (16%,4)

=

140 x 5.066

=

709.24

Redemption value = 1,000

Terminal value of the proceeds from the bond = 1709.24

Define r as the yield to maturity. The value of r can be obtained from the equation

900 (1 + r)4

= 1709.24

r

15.

= 0.1739 or 17.39%

Intrinsic value of the equity share (using the 2-stage growth model)

(1.18)6

2.36 x

1 - ----------2.36 x (1.18)5 x (1.12)

(1.16)6

=

--------------------------------- + ----------------------------------0.16 0.18

(0.16 0.12) x (1.16)6

16.

2.36 x

Rs.74.80

- 0.10801

----------- + 62.05

- 0.02

=

4.00 (1.10)

4.00 x 4 x (0.10)

-------------- + --------------------0.18 0.10

0.18 0.10

=

=

55 + 20

Rs.75

17.

Po =

Po

=

D1

rg

Rs. 8

Rs. 266.7

0.15-0.12

Po =

E1

r

+ PVGO

Po =

Rs. 20 +

PVGO

0.15

Rs. 266.7 = Rs. 133.3 + PVGO

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