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t=1
11
100
+
(1.15)t
(1.15)5
(ii)
Note that when the discount rate and the coupon rate are the same the value is
to par value.
3.
equal
The yield to maturity is the value of r that satisfies the following equality.
7 120
1,000
Rs.750 =
+
t
t=1 (1+r)
(1+r)7
Try r = 18%. The right hand side (RHS) of the above equation is:
Rs.120 x PVIFA (18%, 7 years) + Rs.1,000 x PVIF (18%, 7 years)
=
Rs.120 x 3.812 + Rs.1,000 x 0.314
=
Rs.771.44
Try r = 20%. The right hand side (RHS) of the above equation is:
Rs.120 x PVIFA (20%, 7 years) + Rs.1,000 x PVIF (20%, 7 years)
= Rs.120 x 3.605 + Rs.1,000 x 0.279
= Rs.711.60
Thus the value of r at which the RHS becomes equal to Rs.750 lies between 18% and
20%.
x 2%
= 18.7%
4.
80 =
10 14
100
+
t=1 (1+r) t
(1+r)10
82 - 80
= 18% + ----------- x 2%
82 74.9
= 18.56%
4.
P =
12
t=1
100
+
(1.08) t
(1.08)12
5.
Bond B
Post-tax interest (C )
12(1 0.3)
=Rs.8.4
10 (1 0.3)
=Rs.7
100 [ (100 60)x 0.1]
=Rs.96
The post-tax YTM, using the approximate YTM formula is calculated below
Bond A :
Post-tax YTM =
=
Bond B :
Post-tax YTM =
=
8.4 + (97-70)/10
-------------------0.6 x 70 + 0.4 x 97
13.73%
7 + (96 60)/6
---------------------0.6x 60 + 0.4 x 96
17. 47%
6.
P =
14
t=1
100
+
(1.08) t
(1.08)14
Since the growth rate of 6% applies to dividends as well as market price, the market
price at the end of the 2nd year will be:
9.
P2
=
=
Po
=
=
D1 / (r g)
=
Do (1 + g) / (r g)
Rs.12.00 (1.10) / (0.15 0.10)
=
Rs.264
10.
11.
Po
D1 / (r g)
Rs.32 =
g
=
Rs.2 / (0.12 g)
0.0575 or 5.75%
Po
Do
So
8
D1/ (r g) = Do(1+g) / (r g)
Rs.1.50, g = -0.04, Po = Rs.8
=
=
The market price per share of Commonwealth Corporation will be the sum of three
components:
A:
B:
C:
A=
B=
P8 / (1.14)8
P8 = D9 / (r g) =
So
C
Thus,
Po
=
=
13.
Let us assume a required rate of return of 12 percent. The intrinsic value of the equity
share will be the sum of three components:
A:
Present value of the dividend stream for the first 5 years when the
growth rate expected is 15%.
B:
Present value of the dividend stream for the next 5 years when the
growth rate is expected to be 10%.
C:
A=
=
=
B=
4.42
--------(1.12)6
Rs.10.81
C=
=
4.86
5.35
5.89
6.48
+ -------------- + --------------- + ------------- + ------------(1.12)7
(1.12)8
(1.1.2)9 (1.12)10
D11
1
6.48 (1.05)
-------- x --------------- = ------------------- x 1/(1.12)10
rg
(1 +r)10
0.12 0.05
Rs.97.20
= 1709.24
r
15.
= 0.1739 or 17.39%
Intrinsic value of the equity share (using the 2-stage growth model)
(1.18)6
2.36 x
1 - ----------2.36 x (1.18)5 x (1.12)
(1.16)6
=
--------------------------------- + ----------------------------------0.16 0.18
(0.16 0.12) x (1.16)6
16.
2.36 x
Rs.74.80
- 0.10801
----------- + 62.05
- 0.02
4.00 (1.10)
4.00 x 4 x (0.10)
-------------- + --------------------0.18 0.10
0.18 0.10
=
=
55 + 20
Rs.75
17.
Po =
Po
=
D1
rg
Rs. 8
Rs. 266.7
0.15-0.12
Po =
E1
r
+ PVGO
Po =
Rs. 20 +
PVGO
0.15
Rs. 266.7 = Rs. 133.3 + PVGO