Week 5

5th Seminar. Financial system

Yn
VD=
i r n where: VD= discounted value
[1+ ( ) 100
]

Yn=future income from year n (to be discounted)

Ir=interest rate

n= period to be discounted (usually years)

P
P . E . R .= where: P.E.R.= price-to-earnings ratio
I

P=price, rate of the stock

I= income (interest or dividend) brought / year by the security

E=I + ∆ c where: E= earning of the investor

Δc= difference in price

I
P= where: P= price of the securities
i r /100

Exercises:

1. A person has 400 bonds that bring him a quarterly income of 1000 $.
a) If the interest rate would be 20% per year, what would be the minimum price
that this person should ask for these securities?
b) How would the price change if the interest rate would grow to 25%?
c) What about the situation where it would decrease to half?
2. What is the net discounted value of 100.000 $ if the interest rate on the market is
25%?
3. At the 1st of April a transaction was signed, with a maturity after 3 months. The
transaction included 1000 shares of Company Y. The price established was 500
$/share. At maturity (1st of July) the price listed at the stock market is:

Maturity Maturity after 30 days Maturity after 90 days

505 495 490
Who benefited after this transaction and by how much?
Week 5

4. At the beginning of the year a person purchased shares worth 10 million $. The
dividend received was 1000 $/share. At the end of the year the price of one share
was 11000 $, expressing a growth of 10% compared to the moment of purchase.
a) If the interest rate on the market was 18%, how efficient do you think the
purchase was?
b) What would have been the highest interest rate possible for the purchase to be
efficient?
c) What is the price-to-earnings ratio?
5. The following data is known about 3 companies:

Company A Company B Company C

Profit/ share in the last year 10 16 20
Dividend/ share 10 8 4
Price of share on stock market 50 160 40
Number of shares released 6000 2000 20.000
Discounted value of future profits 100.000 400.000 400.000
(expected)
a) Which company obtains the highest gain/share?
b) What will be the price-to-earnings ratio?
c) Which company is more indicated for taking over?

Homework

1. A person owns 5000 shares, that bring him a yearly income of 100 $/ each. The
interest rate in the economy is 20% p. y. Find:
a) What would be the minimum price that he should ask / share?
b) How would the price of the share evolve if the interest rate grows to 25%?
c) What is the interest rate decreases to 12,5%?

2. In order to attract money from the population the Ministry of Finance released
treasury certificates with a nominal value of 1 million $ and with an interest rate of
16%.
a) If the average interest rate in the economy is 14%, a person who owns treasury
certificates is in loss or in gain? What would be the price of the certificates if they
were resold? Suggestion: compare interest rate (16%) with interest
rate (14%); calculate price( price=dividend/interest rate)
b) For what interest rate of the market would the price of these certificates be
equal with their nominal value?

Suggestion: the treasury certificates are very similar to the bonds, use
calculations as if they were bonds