Question 1

ABC Ltd has two bonds details are as under:

A B
Face value of the bond 100 100
Coupon rate 16% 9%
Market value 110 ?
Remaining term (Years) 3 4
Market rate (Kd) ? 11%
Redemption Value 105 100

Required
Find the market value of bond A and Market rate for Bond B.

Solution

Market rate (Kd) for bond A will the IRR

- 1 2 3
Market Value (110)
Interest 16 16 16
Redemption value 105
Net Cash Flows (110) 16 16 121
PV at 10% (110) 14.55 13.22 90.91 8.68 NPV (+ve)
PV at 15% (110) 13.91 12.10 79.56 (4.43) NPV (-ve)

a 10%
b 15%
A 8.68
B (4.43)

IRR = a + (A/(A-B)) x (b-a) 13.31%

Market value of bond B

1 2 3 4
Interest 9.00 9.00 9.00 9.00
Redemption 100
Net Cash 9.00 9.00 9.00 109.00
PV at Mkt Rate (Kd) 8.11 7.30 6.58 71.80

Market value per bond (Rs) 93.80

Question 2
Ehsan Limited has the following capital structure on 31 Dec 2023:

Share Capital (Rs 10 per share) 800,000

Reserves 3,360,000
6% Bond (redeemable on 31 Dec 25) Face Value Rs 100 2,450,000
7.6% Bond (redeemable on 31 Dec 26) Face Value Rs 100 1,470,000

Further information

1. Dividend history for the last few years:

Year 2022 2021 2020 2019

Dividend 10.2676 9.4605 9.0100 8.5000

2. Price earnings ratio of the company in market is observed at 8.

3. Dividend payout ratio is determined to be 65%

4. 6% bond has a market value of Rs 102.6 per bond.

5. Market rate for 7.6% bond is 5.1% p.a.

Required
Calculate WACC of the company on 31 Dec 2022

Solution

Weighted Average cost of company

Source Mkt Value Rate Amount

Equity 10,109,609 15.153% 1,531,922
6% Bond 2,513,700 5.1422% 129,259
7.6% Bond 1,600,012 5.1000% 81,601
14,223,321 1,742,781
WACC 12.25%

Equity

Dividend per share 2022 10.2676

Dividend payout ratio 65%
EPS (grossed up) 15.7963 (55.0825/65%)
PE multiple 8.00
Market Value per share 126.37

Market value of total equity 10,109,609

Cost of equity

Growth rate
Latest dividend 10.2676
Oldest Dividend 8.5000
Time 3 Years
Growth rate 6.5000% (10.2676/8.5)^(1/3)-1

Cost of equity
Dividend par share (Latest) 10.2676
Growth rate in dividend 6.500%
Market Value per share 126.37
Ke 15.153%

6% Bond market value is given as Market Rate (Kd) is missing

- 1 2 3
Market Value (102.60)
Interest 6 6 6
Redemption value 100
Net Cash Flows (103) 6 6 106
PV at 10% (103) 5.45 4.96 79.64 -12.55 NPV (-Ve)
PV at 4% (103) 5.77 5.55 94.23 2.95 NPV (+Ve)

a 4%
A 2.95 b 10%
B (12.55)
IRR = a + (A/(A-B)) x (b-a) 5.14%

Market Value
Market Value per bond of Rs 100 102.60
6% Bonds in issue 24,500
Total Market Value 2,513,700

7.6% bond (Market rate is given Market Value is to be found out)

1 2 3 4
Interest 7.60 7.60 7.60 7.60
Redemption value 100
Net Cash Flows 8 8 8 108
PV at 5.1% 7.23 6.88 6.55 88.19 108.84

Market Value
Market Value per bond of Rs 100 108.84
7.6% Bonds in issue 14,700
Total Market Value 1,600,012