Value of bonds

1. Compute the price of a 10-year bond, 12 per cent coupon with par value of Rs.1000. The
required rate of return may be assumed to be 13 per cent.
Rs 946

2. Consider an 10-year bond, 10 per cent coupon bond with par value Rs.100 on which
interest is paid quarterly. The required rate on the bond is 12 per cent. Calculate price of
the bond. Is the bond trading at discount, premium or at par to Face Value?
Coupon rate per annum= 10%
Coupon rate per quarter= 10%/4=2.5%
Required yield per quarter=12/4=3%
n=10*4=40 periods
Price= Rs 88.45
Bond is discount to face value

3. A company's bonds have a par value of Rs.100, mature in 5 years, and carry a coupon rate
of 10 percent payable semi-annually. If the appropriate discount rate is 14 percent, what
price should the bond command in the market place? Is the bond trading at discount,
premium or at par to Face Value?
Rs 85.94, Discount
4. A company's bonds have a par value of Rs.100, mature in 5 years, and carry a coupon rate
of 10 percent payable monthly. If the appropriate discount rate is 9 percent, what price
should the bond command in the market place? Is the bond trading at discount, premium
or at par to Face Value?
Rs 104, Premium
5. A company's bonds have a par value of Rs.100, mature in 5 years, and carry a coupon rate
of 10 percent payable semi-annually. If the appropriate discount rate(YTM, REQUIRED
RATE OF RETURN ON BOND) is 10 percent, what price should the bond command in
the market place?
Rs 100
6. Consider a Rs.1000 par value bond, carrying a coupon of 10 per cent, maturing after 9
years at 10% discount. The bond is currently selling for Rs.900. What is the YTM on this
bond?
 YTM= 11.11%
Redemption Value=Rs 900, Current Market Price= Rs 900, n=9, Coupon= Rs 100
YTM=100+[(900-900)/9]/[(900+900)*0.5]= 11.11%
7. Consider a 10-year bond carrying a coupon of 14 per cent issued 3 years ago for Rs.1000
(its par value). Its interest rate has fallen so the investors now expect a return of 10 per
cent from this bond. And secondly what is the price of the bond when the interest rate rise
and investors expect 18 per cent from the bond.
Value of the bond at 10% and 18%- YTM
Redemption Value= Rs 1000, Current Market Price=?, n=7, Coupon rate= 14%
@10%, n=7, Value of Bond= 1194.78
@18% ,Value of Bond= 847

8. Compute the current yield of a 10-year, 10 per cent coupon bond with a par value of Rs.
1000 and selling for Rs.900.
Current Yield= 100/900=11.11%
9. You are considering investing in one of the following bonds:

Coupon rate Maturity Price / Rs.100 par value

Bond A 12% 10 yrs 70
Bond B 10% 6 yrs 60

YTM can determine which bond is better

YTM of A: C+{(F-P)/n}/[(F+P)/2]= 12+{(100-70)/10}/[(100+70)/2]= 17.64%

YTM of B: 10+{(100-60)/6}/[(100+60)/2]= 20.83%

B is preferred
10. A company's bonds have a par value of Rs.100, mature in 5 years, and carry a coupon rate
of 10 percent payable semi-annually. If the appropriate discount rate is 14 percent, what
price should the bond command in the market place?
Price<100
Price= Rs 86
11. A company's bonds have a par value of Rs.100, mature in 5 years, and carry a coupon rate
of 10 percent payable semi-annually. If the appropriate discount rate is 9 percent, what
price should the bond command in the market place?
Price>100
Price= Rs 104
12. A company's bonds have a par value of Rs.100, mature in 5 years, and carry a coupon rate
of 10 percent payable semi-annually. If the appropriate discount rate is 10 percent, what
price should the bond command in the market place?
Price= Rs 100
13. Evaluate the market price of a perpetual bond with face value=Rs.1000, coupon =8%
p.a.& YTM = 9%.

Perpetual Bonds, number of years to maturity is infinite

Value of Bond= C*PVIFA(r,n)+M*PVIF(r,n)

M=0, n = infinite

Value of Bond= FVA/r= 80/0.09= Rs 888.88

14. Assume a zero-coupon bond pays Rs.1000 when it matures 5 years from today and that
the yield to maturity on the bond equals 4.5%. What is the price of the bond?
Value of Bond= C*PVIFA(r,n)+M*PVIF(r,n)
Zero coupon Bond- Bonds that pays no coupon
Value of Bond= M*PVIF(r,n)
Value of Bond= 1000*PVIF(4.5%, 5)= 1000/1.045^5= Rs 802.45
 Valuation of Preference Shares

15. Compute the value of an 10-year, 9 per cent preference stock with par value Rs.100. The
required rate of return on this preference stock is 10 per cent.

Price= D*PVIFA(r,n)+M*PVIF(r,n)

Rs 93.84
Valuation of Equity
16. Prestige’s equity share is expected to provide a dividend of Rs.2 and fetch a price of
Rs.18 a year hence. What price would it sell for now if investors’ required rate of return is
12 per cent?
D1=2, P1= Rs 18, Ke= 12%, P0= ?
P0=D1*PVIF(Ke,n)+P1*PVIF(Ke,n)
Or
P0=(D1+P1)*PVIF(Ke,n)
P0= Rs 17.86
17. The expected dividend per share on the equity share of Roadking Ltd. is Rs.2. The
dividend per share has grown over the past five years at the rate of 5 per cent per year and
the growth rate will continue in future and the market price of the share is expected to
grow at the same rate. What is the fair estimate of the intrinsic value of the share when
the required rate of return is 15 per cent?
D1=2, g=5%, Ke=15%
P0=D1/(Ke-g)= 2/(0.15-0.05)=Rs 20
18. The expected dividend per share of Vaibhav Ltd. is Rs.5. The dividend is expected to
grow at the rate of 6 per cent per year. If the price of the share is now Rs.50, what is the
expected return?
Ke=16%
19. Ramesh Engineering is expected to grow at the rate of 6 per cent per annum. The
dividend expected a year hence is Rs.2. What is its expected price, if the required rate of
return is 14 per cent?
P1=D2/(Ke-g)=D1*(1+g)/(Ke-g)=P0*(1+g)
P1=P0*(1+g)=25*1.06=Rs 26.5
20. The current dividend on an equity share of Vertigo Ltd. is Rs.2. Vertigo Ltd.is expected
to enjoy an above normal growth rate of 20 per cent for a period of 6 years and
thereafter, the growth rate will fall and stabilize at 10 per cent. What is the intrinsic value
of the share if investors require a rate of return of 15 per cent?
D1 to D6
P6
Value= PV of D1 to D6+PV of P6
P6= D7/(Ke-g)
Intrinsic Value= Rs 70.751
Eg- Stock is currently trading at Rs 82
Overvalued
21. The equity stock of Rax Ltd. is currently selling at Rs.30 per share. The dividend
expected next year is Rs.2. The investors’ required rate of return on this stock is 15 per
cent. If the constant growth model applies to Rx Ltd., what is the expected growth rate?

g=8.3%

22. Vardhaman Ltd.’s earnings and dividends have been growing at the rate of 18 per cent per
annum. This growth rate is expected to continue for 4 years. After that the growth rate
will fall to 12 per cent for the next 4 years. Thereafter the growth rate is expected to 6 per
cent forever. If the last dividend per share was Rs.2 and the investors required rate of
return is 15 per cent, what is the intrinsic value per share?
D1 to D4, growth rate= 18%
D5 to D8, growth rate= 12%
Growth rate will be 6% forever
Value of stock= PV of dividends + PV of P8
P0=D1/(Ke-g)
P8=D9/(Ke-g)=D8*(1+g)/(Ke-g)
D0=2, D1=2*1.18= 2.36, D2=2.36*1.18=2.78, D3= 2.78*1.18=3.29, D4=3.29*1.18=3.88
D5=3.88*1.12=4.34, D6=4.34*1.12=4.86, D7=4.86*1.12=5.45, D8=5.45*1.12=6.10
PVofDividends=2.36*PVIF(15%,1)+2.78*PVIF(15%,2)+3.29*PVIF(15%,3)+3.88*PVIF
(15%,4)+4.34*PVIF(15%,5)+4.86*PVIF(15%,6)+5.45*PVIF(15%,7)+
6.10*PVIF(15%,8)= 2.05+2.10+2.16+2.22+2.15+2.10+2.04+1.99= Rs 16.83
P8=D9/(Ke-g)=D8*(1+g)/(Ke-g)
P8=6.10*(1+0.06)/(0.15-0.06)= Rs 71.84
 PV of P8= 71.84*PVIF(15%,8)= Rs 23.48
Value of stock= PV of dividends + PV of P8
Value of stock= 16.83+ 23.48= Rs 40.31
23. The current dividend on an equity share of Pioneer Technology is Rs.3. Pioneer is
expected to enjoy an above-normal growth of 40 per cent for the next 5 years. Thereafter
the growth will fall and stabilise at 12 per cent. The equity investors require a rate of
return of 15 per cent. What is the intrinsic value of the share?
D0= Rs 3, g1=40%,g2=12% n=5, Ke=15%, 2 Stage
PV of Dividends for 1-5 years+ PV of Terminal Value, P5
P0=28 + 300= Rs 328
24. The share of a certain stock paid a dividend of Rs.3.00 last year. The dividend is expected
to grow at a constant rate of 8 percent in the future. The required rate of return on this
stock is considered to be 15 percent. How much should this stock sell for now? Assuming
that the expected growth rate and required rate of return remain the same, at what price
should the stock sell 3 years hence?

P0=D1/(Ke-g)=3*(1.08)/(0.15-0.08)=46.29

P3=P0*(1+g)^3= Rs 58.312

P3=D4/(Ke-g)

25. The equity stock of Hansa Limited is currently selling for Rs.280 per share. The dividend
expected next is Rs.10.00. The investors' required rate of return on this stock is 14
percent. Assume that the constant growth model applies to Hansa Limited. What is the
expected growth rate of Hansa Limited?
g=10.42%

26. Sloppy Limited is facing gloomy prospects. The earnings and dividends are expected to
decline at the rate of 5 percent. The previous dividend was Rs.2.00. If the current market
price is Rs.10.00, what rate of return do investors expect from the stock of Sloppy
Limited?

Po = D1/ (Ke – g) = 2.00 (1- .05) / (r-(-.05))

Ke=14%
27. Mammoth Corporation is facing gloomy prospects. The earnings and dividends are
expected to decline at the rate of 10 percent. The previous dividend was Rs.3.00. If the
current market price is Rs.25.00, what rate of return do investors expect from the stock of
Mammoth Limited?
0.8%