Assignment No 02

Name: M. Irfan Ahmed

SAP ID: 20373
Subject: Financial Analysis in Investment Management
Submitted to: Dr. Zulfiqar Ali Shah Saheb

M/s. ABC and company has appointed Mr. A for their financial operations. As first of his task, he has to
calculate Intrinsic values and YTMs of preference shares and Debentures. He catered data of the
company which shows that company has 5,000,000 ordinary shares outstanding, each being traded in
the market for 48 Rs. Per share. Initially issues at 250% premium 5 years back. Current cost of equity is
17%. Company has 2,000,000 in retained earnings, 0.8 million in reserves. Company also has 12%,
80,000 debentures outstanding, 80% of which are for 18 years and are being traded in the market for
1120 rs initially issued 4 yaers back for 20 % premium. Remaining are perpetual and being traded in
the market for 1020 per debenture and were issued 5 years back on 10% discount. Company also has
14% , 2,000,000 loan from HBL, 10% 1,000,000 loan from NBP. Company has two types of preference
shares outstanding. One is 9%, 200,000, being traded in the market for 135 Rs. Per share initially issued

m
@ 30% premium and callable after 20 years at 20% premium. Other type are 7% 100,000 outstanding

er as
initially issued @ 10% discount and now being traded @ 122 Rs. Per share. Company pays 40% tax.

co
eH w
Required: - If required rate of return of investors is 16% what should be the intrinsic values of these
shares.

o.
rs e
b) if shares and debentures are bought on their current market values what should be their yields?
ou urc
Years 1 2 3 4 5 6……………… 18
o
aC s

Cash Flow 134 134 134 134 134 134 134

vi y re

(1120*12%)
Present Value 1120
ed d
ar stu

Return * ((1-(1+i)^-n)/i) + FV/ (1+i)^ n

134* ((1-(1+.16) ^-14)/.16 + 1120/ (1+.16) ^14
is

732.64 + 140.22
Th

872.87 - 1120 = -247

It is assumed that Lowest rate is 10%
sh

1120 = R * ((1-(1+i)^-n)/i) + FV/ (1+i)^ n

134* ((1-(1+.10)^-14)/.10 + 1120/(1+.10)^14
987.17 + 294.93
1282 – 1120 = 162

This study source was downloaded by 100000824002871 from CourseHero.com on 07-04-2021 10:37:46 GMT -05:00

https://www.coursehero.com/file/75617609/Home-Assignment-2docx/
 Formula of interpolation
Lower %age + Difference between two percentages 6 (value of difference @ lower %age/ value of
difference @ lower %age – Value of difference @ higher %age)
.10 + .06 * (162/(162-(-247))
=0.1238
=0.1238*100
Yield to Maturity YTM = 12.38

Perpetual Bond
Intrinsic value/ Fair Value
MPD 1020
Life Unlimited

m
CR .12

er as
RRR .16

co
P.Value 1120

eH w
o.
Years 1 2
rs e3 4 5 6………………
ou urc
C.F 134 134 134 134 134 134 ………….
o

PVP = R/I = 134/.16 =837.5

aC s
vi y re

YTM = R/MPD = 134/1020 = .1313

ed d

PREFERENCE SHARE
ar stu

PAR VALUE 100

DIVIDEND RATE .09
MARKET VALUE 135
is

RRR .16
Th

MATURITY LIFE 20
0 1 2 3 4 ……………………………….20
135 9 9 9 9…………………………………9
sh

Intrinsic Value = Return (R) / Required rate of return (i) ,

9/.16 = 56.25
YTM = KP = Preference Dividend / Market Value Rate (KP)
9/135 = .06667

This study source was downloaded by 100000824002871 from CourseHero.com on 07-04-2021 10:37:46 GMT -05:00

https://www.coursehero.com/file/75617609/Home-Assignment-2docx/
 CALLABLE PREFERENCE SHARE
PAR VALUE 100
DIVIDEND RATE .09
MARKET VALUE 135
RRR .16
CALLPRICE 120
CALL PERIOD 20

0 1 2 3 4 …………………………………20
135 9 9 9 9 9 +120
Intrinsic Value = Return ((1-(1+I) ^N)/I) + Future Value / (1+I) ^N
= 9 * (1- ((1+.16) ^20/.16) + 120/ (1+.16) ^20
= 53.3595 + 6.1662 + 135
= 160.627

m
er as
PREFERENCE SHARE
PAR VALUE 100

co
eH w
DIVIDEND RATE .07
MARKET VALUE 122

o.
RRR .16
rs e
ou urc
0 1 2 3 4 …………..
122 7 7 7 7……………
o

Intrinsic Value = Return / Required rate of Return, R/ I

aC s

=7 / 0.16
vi y re

= 43.75
YTM = KP = Preference Dividend / Market Value Rate (KP)
= 7 / 122
ed d

= 0.05737
ar stu
is
Th
sh

This study source was downloaded by 100000824002871 from CourseHero.com on 07-04-2021 10:37:46 GMT -05:00

https://www.coursehero.com/file/75617609/Home-Assignment-2docx/
Powered by TCPDF (www.tcpdf.org)