Market rate/discounting rate > Coupon rat

Market rate/discounting rate = Coupon rat

Market rate/discounting rate < Coupon rat

Question 1:

ABC Ltd. Issued a debt with a face value of NPR 100,000 and Coupon
coupon rate of 12%. The debt was due to mature in 10 years. amount=
Calculate the value of the debt based on a market rate of 0.12*100,000=
11%. 12,000

Time Interest payments

1 12,000
2 12,000
3 12,000
4 12,000
5 12,000
6 12,000
7 12,000
8 12,000
9 12,000
10 12,000
Value of debt (Vd)

Question 2:

ABC Ltd. Issued a debt with a face value of USD 25,000 and
coupon rate of 15%. The debt was due to mature in 7 years.
Calculate the value of the debt based on a discounting rate of
13%.

Time Interest payments

1 3750
2 3750
3 3750
4 3750
5 3750
6 3750
7 3750
Value of Debt

Question 3:

SML Pvt. Ltd. Issued a debt worth USD 125,000 with a

maturity of 10 years. It demands a coupon amount of USD
17250 at the end of every year. Calculate the value of this
debt given a market rate of 14% p.a.
Time Interest payments
 1 17250
2 17250
3 17250
4 17250
5 17250
6 17250
7 17250
8 17250
9 17250
10 17250
Value of Debt (Vd)
ket rate/discounting rate > Coupon rate Vd < FVd
ket rate/discounting rate = Coupon rate Vd = FVd PV= FV/(1+r)^n
ket rate/discounting rate < Coupon rate Vd> FVd

Principle payment Total CFs

x 12,000 10810.81
x 12,000 9739.47
x 12,000 8774.30
x 12,000 7904.77
x 12,000 7121.42
x 12,000 6415.69
x 12,000 5779.90
x 12,000 5207.12
x 12,000 4691.10
100,000 112,000 39444.66
105889.23

Principle payment Total CFs PV

0 3750 3318.58
0 3750 2936.80
0 3750 2598.94
0 3750 2299.95
0 3750 2035.35
0 3750 1801.19
25000 28750 12220.49
Value of Debt 27211.31

Principle payment Total CFs PV

 0 17250 15131.58
0 17250 13273.31
0 17250 11643.26
0 17250 10213.38
0 17250 8959.11
0 17250 7858.87
0 17250 6893.74
0 17250 6047.14
0 17250 5304.51
125000 142250 38371.06
Value of Debt (Vd) 123695.97
Question 1: Vp= Preferred dividend/r

A company issued a preferred share with

a face value of NPR 150,000 and pays an
annual constant dividend at 15% p.a. If
the discounting market rate is 13% p.a.,
calculate its value
FV= NPR 150,000
PD rate= 15% p.a.
PD= 22500
r= 13%

Vp 173076.923

Question 2:

A company issued a preferred share with

a face value of USD 20,000 and pays an
annual constant dividend at 11% p.a. If
the discounting market rate is 15% p.a.,
calculate its value

FV= 20,000
PD rate 11% p.a.
PD 2200
r= 15% p.a.

Vp= 14666.6667
Question 3:

A company issued a preferred share with

a face value of USD 345,000 and pays an
annual constant dividend of USD 22,000
p.a. If the discounting market rate is 9%
p.a., calculate its value

FV= 345,000
PD= USD 22000
r= 9% p.a

Vp 244444.444
Dividend Discount Model (DDM)

Formula: Ve= D1/(r-g)

Explanation:
Dividend
D1= Dividend at the end of Year 1/ Dividend to be paid after a year
D0= Dividend paid at Year 0/ Dividend paid at present/ Dividend paid currently

D1= D0 (1+g)
For example:
D0= 100 D1= 100+ 0.10*100
g= 10% D1= 100 (1+0.10)
D1=? D1= 110

Growth Rate
g= retention rate * ROE or (1-payout ratio)*ROE
retention rate= the ratio of retaining the net profit
For example:
Net profit= 100
Dividend= 60 payout ratio= 60%
Retained= 40 retention ratio= 40% 0.4
Question 1

DTL Enterprises recently paid a dividend worth USD 250 per

share. The dividend payout ratio is assumed to be 35% while the
return on equity is 25%. Given a required rate of return of 20%,
value the equity of DTL Enterprises usine the DDM.

Solution:
Ve= D1/(r-g)

D0= USD 250

p= 35% or 0.35
ROE= 25%
r= 20%

g= retention ratio* ROE or (1-payout ratio)*ROE

16.25%

D1= D0(1+g)
290.625

Ve= D1/(r-g)
7750.00
Question 2
Raghav Enterprises recently paid a dividend worth NPR
375 per share and is assumed to pay dividend at a
constant growth rate. If the retention ratio is 75% and
the return on equity is 10%, calculate the value of
equity given, the required rate of return of 12%.

D0= NPR 375

retention ratio= 0.75
ROE= 10%
r=12%
g= 0.75*0.10
7.50%

D1= 375*(1+0.075)
403.125

Ve= 403.125/(0.12-0.075)
8958.33
Question 3
NIBL Capital is expected to pay a dividend of NPR
7500 per share. Given a payout ratio of 25% and a
return on equity of 30% what is the Value of its
equity given investors demanding a minimum
required rate of 25%?
Question 4
Ace ventures paid dividend worth NPR 2500
to its shareholders. It has a retention ratio of
28% and ROE worth 45%. If the required rate
of return by shareholders is 18%, what is the
value of its equity?

Ve= D1/(r-g) Ve= D1/(r-g)

D1= 7500 D0= NPR 2500

p=0.25 retention ratio= 28%
ROE=30% ROE=45%
r=25% r=18%

g=(1-p)*ROE g=0.28*0.45
22.50% 12.60%

Ve= 7500/(0.25-0.225) D1= D0*(1+g)

300000 2815

Ve= 2815/(0.18-0.1260)
52129.63