VALUATION AND RATE OF

RETURN
OUTLINE

• VALUATION OF BONDS
• VALUATION OF COMMON STOCK
• VLUATION OF PREFFERED STOCK
VALUATION OF BONDS

• Valuation of bonds is the process of determining

the amount of security at the time the bond is
issued. The value of a bond is obtained by getting
the sum of all the present value of all the interest
payments in addition to the present value of the
principal using the investor’s required rate of
return. To compute the value of the bond, the ff.
formula is used:
VALUATION OF BONDS

• Example:
• On March 1, 2013, Vernon Business. Inc. sold
face-value bonds worth 500,000 with a required
rate of 12%. The bonds will mature in 10 years
with 12% interest payable annually every January
1. What is the value of the bond?
VALUATION OF BONDS

• Answer:
VALUATION OF BONDS

• BOND DISCOUNT
• If the selling price of the bond is less than its
par value, the bond is said to be issued at a
discount.
VALUATION OF BONDS

• Example:
• On March 1, 2013, Vernon Business. Inc. sold
face-value bonds worth 500,000 with a required
rate of 12%. The bonds will mature in 10 years
with 10% interest payable annually every January
1. What is the value of the bond?
VALUATION OF BONDS

• BOND PREMIUM
• If the selling price of the bond is
greater than its par value, the bond is
said to be sold at a premium.
VALUATION OF BONDS

• Example:
• On March 1, 2013, Vernon Business. Inc. sold
face-value bonds worth 500,000 with a required
rate of 12%. The bonds will mature in 10 years
with 15% interest payable annually every January
1. What is the value of the bond?
VALUATION OF BONDS
(Required Rate of Return and Bond Price)

• The value of a bond changes over time. The change is attributable to

two factors, namely the time and the required rate of return.

• If the required rate of return is not the same as the coupon rate, the
value of the bond decreases if it was issued at a premium or increases if
it was issued at a a discount.

• As the required rate of return increases, the value of the bond

decreases. In contrast, if the required rate of return decreases, the
value of the bond increases.
VALUATION OF BONDS

• Example
• ABC Corporation issued a bond with a par value of
100,000. The coupon rate is 10% with interest
payable every year for 10 years. Determine the
value of the bond using the ff. required rate of
return: 6%, 7%, 8%, 9%, 10%, 11%, 12%, 13% 14%,
15%.
VALUATION OF BONDS

• REQUIRED RATE OF RETURN BOND PRICE

• 6% P129,440
• 7% 121, 071
• 8% 113,420
• 9% 106,418
• 10% 100,000
• 11% 94,111
• 12% 88,700
• 13% 83,721
• 14% 79,906
• 15% 74,906
VALUATION OF BONDS
(IMPACT OF TIME ON THE BOND PRICE)

• Another factor that affects the value of a bond is

the maturity date. However, if the required rate
of return is the same as the coupon rate the issue
price will always equal the par value regarless
how far or near the maturity date is.
VALUATION OF COMMON STOCKS

• The value of a common stock may be

measured by a shareholder as the present
value of an expected stream of the future
dividends in addition to the present value of
the future price of stock at the time.
VALUATION OF COMMON STOCKS

• Example :
• Mr. T purchased stock F at the beginning of the
year. The dividend at the end of the year is
expected to be P2.50 per share and the market
price is expected to be P60. If the investor
required rate of return is 15%, the value of the
stock is as follows:
THE GROWTH FACTOR

• Growth is realized through the infusion of new capital.

• Capital increases by means of issuing bonds or new share
of stock.

• THE GROWTH FACTOR ATTRIBUTE TO TWO RESOURCES:

• EXTERNAL
• INTERNAL
THE GROWTH FACTOR

• THERE ARE THREE KINDS OF GROWTH THAT CAN BE ASSOCIATED

WITH THE VALUATION OF STOCK:

• I. NO GROWTH
• II. CONSTANT GROWTH
• III. VARIABLE GROWTH
NO GROWTH

• -This valuation assumes that the dividends are not giving

at all.
• - Thus the amount of dividends declared is constant.
CONSTANT GROWTH MODEL
VALUATION OF PREFFERED STOCKS

• Valuing a preferred stock is similar to valuing

bond i.e there is a fixed dividend at a par value.
By, nature a preferred stock is receive a fixed
dividend before a common stock. To compute the
value of a preferred stock is easy since it does not
grow like the common stock. To compute the
value of a preferred stock, the ff. formula is
used:
VALUATION OF PREFFERED STOCKS
(Expected Rate of Return)

• The expected Rate of Return is the rate of

estimated income derived from the investing
stock. It is obtained by adding the dividend and
the price of the stock after a year less the
purchase price of the stock over the purchase
price.
VALUATION OF PREFFERED STOCKS
(Expected Rate of Return)

• Example:
• Consider a stock that sells for P50.00. The Company is
expected to pay a P3.00 cash dividend at the end of the
year and the stock of the market price at the end of the
year is expected to be P55.00 a share. Thus, the
expected return is as follows:
OTHER VALUATION TECHNIQUES