TVOM, BASIC OF VALUATION AND BOND VALUATION

QUESTION 1
Bank A:
FV6 = (RM5,000)(1+0.09)6
= RM8,385.50

Bank B:
FV6 = (RM5,000)[1+(0.08/4]6 x 4
= RM8,042.19

Bank A’s plan would result in a higher future value by RM345

QUESTION 2
PVOA5 = (RM12,500) (PVIFA 0.12,5)
=RM45,062.50

You would prefer to receive the RM50,000 today because the present value of the stream
of payments is worth only RM45,062.50

QUESTION 3
a) 14% x RM1,000 = RM140

b) The bond will be sold at a premium because the required rate of return is less than
the bond’s coupon rate. Thus, investors are willing to pay more for this bond
because it pays more interest than the newly issued bonds with similar
characteristic.

c) P0 = (RM140)(7.606) + ($1,000) (0.239)

= RM1,303.84

d) Current yield = (RM140/ RM1,303.84) = 10.74%

e) P0 = (RM70)(15.373) + ($1,000) (0.231)

= RM1,307.11

QUESTION 4
a) Bond A should sell at a discount because the required rate of return exceeds
the coupon rate. Bond B should sell at its par value of RM1,000 because the
required rate of return is equals the coupon rate. Bond C should sell at a
premium because the required rate of return is below the coupon rate.

b) Bond A:
P0 = (RM30)(PVIFA 5%, 20) + (RM1,000)(PVIF 5%, 20)
= RM750.86

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 Bond B:
P0 = (RM50)(PVIFA 5%, 30) + (RM1,000)(PVIF 5%, 30)
= RM999.65

Bond C:
P0 = (RM70)(PVIFA 5%, 40) + (RM1,000)(PVIF 5%, 40)
= RM1,343.13

c) The expectations and calculations agree

QUESTION 5
a) Bond Y should have the greater price sensitivity to a change in the required
rate of return because of its longer maturity. That is, the present value of
future cash flows is more affected by the changes in discount rates than less
distant cash flows.

b) Bond X
P0 = (RM80)(PVIFA 9%, 5) + (RM1,000)(PVIF 9%, 5)
= RM961.20

Bond Y
P0 = (RM80)(PVIFA 9%,15) + (RM1,000)(PVIF 9%, 15)
= RM919.80

c) Each bond sold for its par value of RM1,000 before the change in the required
rate of return. Bond Y would decline in value by RM80.20; (RM1,000 –
RM919.80) compared to a RM38.80; (RM1,000 – RM961.20) decline for
bond X.

QUESTION 6
a) If kd (12%) = I(12%) ; P0 at its par

If kd (11%) < I (12%) ; P0 at its premium

Try kd = 11%
P0 = (RM120)(PVIFA 11%, 18) + (RM1,000)(PVIF 11%, 18)
= RM1076.99
Try kd = 10%
P0 = (RM120)(PVIFA 10%, 18) + (RM1,000)(PVIF 10%, 18)
= RM1164.07
Try kd = 9%
P0 = (RM120)(PVIFA 9%, 18) + (RM1,000)(PVIF 9%, 18)
= RM1262.67

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 INTERPOLASI

RM1262.67 RM1165 RM1164.07

9% YTM 10%

x RM1262.67 – RM1165
=
1 RM1262.67 - RM1164.07

= 0.9905

Thus, 9% + 0.9905

YTM = 9.9905%

b) Approximate YTM = [RM120 + (RM1000 – RM1165 / 18)]

(RM1000 + RM1165) / 2

= 0.1024
YTM = 10.24%

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STOCK VALUATION

QUESTION 1

V = D / k
= $1.60 / 0.15
= $10.67

QUESTION 2

Step 1:
Determine the constant growth rate, g

ks = D1 / Po + g
0.09 = $2 / $40 + g
0.09 = 0.05 + g
g = 0.04 @ 4%

Step 2:
Determine the expected price of the stock 5 years from today

P5 = Po x (1 + g)n
= $40 x (1.04)5
= $40 x 1.21665
= $48.67

QUESTION 3

Step 1:
Calculate the dividends
D1 = $1.25
D2 = $1.25 x 1.20 = $1.50
D3 = $1.50 x 1.20 = $1.80
D4 = $1.80 x 1.08 = $1.944

Step 2:
Calculate the price of the stock at year 3, when it becomes a constant growth
stock

P3 = D4 / (k - g)
= $1.944 / (0.10 - 0.08)
= $97.20

Step 3:
Calculate the price of the stock today

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 P0 @ Vcs= ($1.25 / 1.10) + $1.50 / (1.10)2 + ($1.80 + $97.20) / (1.10)3
= $1.1364 + $1.2397 + $74.3802
= $76.76

QUESTION 4

a. K = D / V
= $3.50 / $48.00.
= 7.29%

b. V = D / K
= $ 3.50 / 0.07
= $50.00

c. Yes, it is a desirable investment because the market value of the stock, $48.00 is lower
than its intrinsic value, $50.00 and the expected rate of return on the stock, 7.29% is
much higher than the investor’s required rate of return, 7%.

QUESTION 5

g =12% g = 7%

0 1 2 3
Do = RM2
Kcs = 10%

D1 = 2 (1+0.12)
D1 = 2.24

D2 = 2.24 (1.12)
D2 = 2.5088

D3 = 2.5088(1.07)
D3 = 2.684

P2 =

P2 =

P2 = 89.48

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P0 @ Vcs = + +

Vcs = 2.036 + 2.073+73.95

Vcs = 78.06

QUESTION 6

g =10% g = 5%

0 1 2 3 4 5 6
D3 =RM1

Kcs = 15%

D4 = 1(1.1)
D4 = 1.10

D5 = 1.10(1.1)
D5 = 1.21

D6 = 1.21 (1.05)
D6 = 1.27

P5 =
P5 = 12.70

Vcs = + + +

Vcs = 8.20

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