ASSIGNMENT # 1

MC190205134

Q1. Intrinsic value of the bond.

n = Year =5

i = Market rate = 14% = 0.14

k = Coupon payments in 1 year = 2

P = Face value = 1000

C = Coupon Payment = Face value x Coupon Rate = 1000 * 12/100= 120

As we know that

 
 
1
1  
 i 
nk

 1   
 k  P
BP  C   
K i  i
nk

k 1  
 k

 
 
 1 
1
  0.14  2*5 
 1   
120   2   1000
BP   
2 0.14  0.14 
2*5

2  1  
 2 

 1 
1  10 
  1  0.07   1000
BP  60  
 1  0.07 
10
0.07

 1 
1  10 
  1.07  
 1000
BP  60  
 1.07 
10
0.07
  1 
1 
  1.967   1000
BP  60  
0.07  1.967 
1   0.5084 1000
BP  60  
0.07  1.967 
0.4916 1000
BP  60  
0.07 1.967

BP   60  7.02   508.4

BP  421.2  508.4

BP  929.6

Q2. Intrinsic Value of stock

Forecasted Future Dividend at end of year 1, DIV1 = PKR6
Forecasted Future Dividend at end of year 2, DIV2 = PKR7
Minimum Required Rate of Return, rCE = 14% = 0.14
Expected Future Selling Price, Pn = 55
Rate of return = 14% per annum = 0.14
Expected or Fair Price, PV =?

As we know that
DIV 1 DIV 1 DIVN Pn
PV    ............. 
1  rE (1  rE ) 2
(1  rE ) (1  rCE ) n
n

6 7 55
PV   
(1  0.14) (1  0.14) (1  0.14) 2
2

6 7 55
PV   
(1.14) (1.14) (1.14) 2
2

6 7 55
PV   
(1.14) (1.3) (1.3)
PV  5.3  5.4  42.31
PV  53.01  53 /Share
So stock is undervalued as the face value is PKR 54/share as compare to the market price value
of PKR 53/share.
Q3. Identify either bond and stocks are overvalued or undervalued. Justify your answer with
proper calculation and reasoning.

In BOND, if the market price value is greater than the current price value then the bond is undervalued
and you should buy it.
If the market price value is lesser than the current price value then the bond is overvalued and you
should sell it.
In the given scenario we have:

Market Price value: PKR940

Current Price value: PKR929.6

So the Bond is undervalued because the market price value is more as compare to current price value.

While in Stock, we have:

Face Value: PKR54

Price value: 53

The price value is lesser than the face value so the Stock is undervalued.