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  • Example of Chapter 6

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    Abdul Muiz
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    The document provides examples of calculating yield to maturity (YTM), bond valuation using the YTM approach, preferred stock valuation, common stock valuation, and calculating expected returns for preferred and common stockholders. It shows calculating the YTM of a bond as 3.45%, valuating bonds using the YTM approach, and how the bond value changes as the YTM increases or decreases. It also demonstrates valuing a preferred stock by taking the dividend rate over the discount rate, and valuing a common stock using the dividend growth model. Lastly, it shows calculating expected returns for preferred and common stockholders and determining whether to buy or sell based on the required return.

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    Stock and bond workaround

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    The document provides examples of calculating yield to maturity (YTM), bond valuation using the YTM approach, preferred stock valuation, common stock valuation, and calculating expected returns for preferred and common stockholders. It shows calculating the YTM of a bond as 3.45%, valuating bonds using the YTM approach, and how the bond value changes as the YTM increases or decreases. It also demonstrates valuing a preferred stock by taking the dividend rate over the discount rate, and valuing a common stock using the dividend growth model. Lastly, it shows calculating expected returns for preferred and common stockholders and determining whether to buy or sell based on the required return.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    5 views3 pages

    Example of Chapter 6

    Uploaded by

    Abdul Muiz
    The document provides examples of calculating yield to maturity (YTM), bond valuation using the YTM approach, preferred stock valuation, common stock valuation, and calculating expected returns for preferred and common stockholders. It shows calculating the YTM of a bond as 3.45%, valuating bonds using the YTM approach, and how the bond value changes as the YTM increases or decreases. It also demonstrates valuing a preferred stock by taking the dividend rate over the discount rate, and valuing a common stock using the dividend growth model. Lastly, it shows calculating expected returns for preferred and common stockholders and determining whether to buy or sell based on the required return.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 3

    Example of Chapter 6

    YTM

    YTM= 2.8 +0.65=3.45%

    Time RM YTM(assume)- PV YTM(assume)- PV


    HR-10% LR=1%
    T0 P0 (105.84) 1 (105.84) 1 (105.84)
    T1-T5 INT 4.62 3.791 17.51 4.853 22.42
    T5 FV/CR 100 0.621 62.10 0.951 95.10
    NPV (26.23) 11.68

    11.68
    YTM≈ 1 + [ ] (10-1) ≈3.77%
    (11.68+ 26.23)
    Bond Valuation

    Wade Co
    RM20 m 7% bond will be redeemed in 3 years at par RM100. Yield to maturity is 5.25%
    Interest =100 x 0.07= RM7
    7 7 7+100 ¿ ¿
    PV/Vb = 1 + 2 + 3
    (1+0.0525) (1+0.0525) (1+0.0525)
    = RM6.65 + rm6.319 + rm91.77= rm104.73

    Wade Co
    RM20 m 7% bond will be redeemed in 3 years at par RM100. Yield to maturity is 6%
    Time RM YTM=6% PV
    T1-T3 Interest 7 2.673 RM18.711
    T3 CR/FV 100 0.840 RM84
    RM102.71
    Relationship 1:YTM increase( 5.25% to 6%), Bond value decrease (RM104.73 TO
    rm102.71)
    Relatinship 2: YTM (6%) < Coupon rate(7%) Market value(RM102.71) > par
    value(rm100)premium bond
    Market value(RM99) < par value(rm100)discount bond

    Stock Valuation
    Preferred Stock
    What is the value of a preferred stock when the dividend rate is 16 percent on a RM100 par
    value? The appropriate discount rate for a stock of this risk level is 12 percent
    VPS= D/rps= (0.16x100)/0.12=rm133.33

    Common stock
    Mosser Corporation’s common stock paid RM1.32 in dividend last year and is expected to
    grow indefinitely at an annual 7 percent rate. What is the value of the stock if you require an
    11 percent return?
    VCS=1.32(1 + 0.07)/ 0.11-0.07=RM35.31

    Preferred stockholder expected return


    You own 200 shares of Shapard Resources’ preferred stock , which currently sell for RM40
    per share and pays annual dividends of RM3.40 per share.
    a. What is your expected return?
    =3.40/RM40=8.5%

    b. If you require an 8 percent return, given the current price, should you sell or buy more
    stock?
    0.08 = 3.40/Vps
    Vps=RM42.50

    Common stockholder expected return


    Alyward & Bren’s common stock currently sells for RM23 per share. The company’s
    executives anticipate a constant growth rate of 10.5 percent and an end year dividend of
    RM2.50.
    a. What is your expected rate of return?
    =2.50/23 +0.105= 21.4%

    b. If you require a 17 percent return, should you purchase the stock?


    = 2.50/(0.17 -0.105)=RM38.46(BUY)

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