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Topic 6
Learning Objectives
Definitions of value
Book value
Liquidation value
Going-concern value
Market value
Intrinsic value
26/02/2015
Recall Topic 5
26/02/2015
(10- 1)
Bond valuation
$I
$I
$I+$M
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Bond valuation
(10-2)
(10-2a)
where $I
$M
Rb
Vb
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Bond valuation
Example (annual coupon):
Suppose our firm decides to issue 20-year bonds with a
par value of $1,000 and annual coupon payments. The
return on other bonds of similar risk is 12%, so we decide
to offer a 12% coupon interest rate.
What would be a fair price for these bonds?
14
Bond valuation
120
120
120
PV ?
0
PV
120
1000
120
19
20
= PMT { [ 1 ( 1 + i ] / i } + FV / ( 1 + i
= 120 x [{ 1 (1.12)-20 } / 0.12] + 1000 / 1.1220
= $1000.00
)-n
)n
or using tables:
PV
= PMT x PVIFAi,n + FV x PVIFi,n
= 120 x PVIFA12%,20 + 1000 x PVIF12%,20
= 120 x 7.469 + 1000 x 0.104
= $1000.28
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Share dividend
The periodic cash flows from an investment in
shares are dividends.
Three possible scenarios for the dividend:
1. Constant Dividend (no growth / zero
growth)
2. Growth in Dividend (constant growth)
3. Variable Dividend Growth
17
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Preference shares
Can be:
cumulative/non-cumulative
redeemable/irredeemable
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(10-5)
Example:
XYZ preference shares pay a $4.12 dividend per year. If
our required rate of return on XYZ preference shares is
9.5%, what would we consider a fair price for these shares?
Answer:
Vp = D / Rp
= 4.12 / 0.095
= $43.37
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Variable-income securities
(10-6)
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VE =
(D1)
VE =
D1
( 1 + RE )
market
+ PV of expected
price (P )
1
P1
( 1 + RE )
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Answer:
VE =
$5.50 + $120
(1 + 0.15) (1+ 0.15)
= $109.13
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(10-7)
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VE = D1 / (RE - g)
D1
RE
g
(10-9)
25
26
For bondholders:
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in Equation 10-9
RE = D1 / P + g
= $3 / $27 + 0.05
= 0.1611
= 16.11%
30
i = 6% per 6 months
YTM = 2 x 6 = 12% p.a.
31