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Problem 1
Problem 2
Problem 3
Problem 4
Problem 5
Taxco (three-year maturity): PVF PVF
Year Cash flow 9% PV (Rs) 12%
1 120 0.917 110.09 0.893
2 120 0.842 101.00 0.797
3 1120 0.772 864.85 0.712
1075.94
Problem 6
Problem 7
20
60 t1, 050
Value of bond= t
+
t =11 ( 1. 07 ) ( 1 .07 )n
60( PVAF 20 , 7 PVAF 10 , 7 ) +1, 050PVF 20 , 7
60 ( 10. 59407 . 0236 ) +1, 0500 .2584=Rs 485 . 57
Problem 8
Value of a bond that pays interest half-yearly can be calculated by the following equation:
1
2n
2
( INT t ) Bn
B 0 = kd
+
t =1 ( 1+
t
) k
2 ( 1+ d )2 n
2
Problem 9
20 year bond redeemable in 12 years: Half-yearly interest 5%; periods 24
24
50t 1, 150
1, 000= t
+
t=1 ( 1+YTC ) ( 1+ YTC )n
YTC=5 . 32
24
50t 1, 100
1, 000= t
+
t=1 ( 1+YTC ) ( 1+ YTC )n
YTC=5 . 22
20 year bond redeemable in 8 years: Half-yearly interest 5%; periods 16
16
50 1, 150
1, 000= t t
+ n
t=1 ( 1+YTC ) ( 1+ YTC )
YTC=5 . 60
Problem 10
Problem 11
Problem 12
You can use the Excel formula to calculate value of redeemable preference share: =PV(rate,nper,pmt,[fv],[type])
Problem 13
Return on share:
Problem 14
It is a desirable investment since the present value of the share is more than its current price.
Problem 15
Problem 16
PV of Rs 579.88
7
579.88/1.10 =579.880.5132=Rs 297.57 297.57
Value of share: 15.58 + 297.57 313.16
Problem 17
(Rs)
Current EPS 5
Retention ratio, b 0.6
Current DPS, DIV0 = EPS0(1 - b) 2
Rate of return, r 0.15
Required rate, ke 0.13
Current share price (Rs) 60
Growth, g = b x r 0.09
Expected EPS (Rs): EPS1 = EPS0(1+g) = 5 x 1.09 5.45
Expected DPS (Rs): DIV1 = DIV0(1+g) = 2 x 1.09 2.18
Expected retained earnings, RE1 = EPS1 - DIV1 3.27
Value of share if g = 0
EPS 1 5 . 45
P0 = =
k e g 0 . 13 0
41.92
Value of share if g = 9%
DIV 1 2 (1+. 09 ) 2 .18
P0 = = =
k e g 0. 13. 09 0. 04 54.50
Value of growth opportunities, Vg (Rs): 54.50 - 41.92 12.58
The following formula can be used to find Vg:
RE 1 ( rk e ) 3 .27 ( . 15. 13 ) . 0654
V g= = =
k e ( k eg ) . 13 ( . 13. 09 ) . 0052
12.58
Problem 18
Problem 19
Problem 20
When the firms growth increases from 5% to 10%, the share prices rises from Rs 52.50 to Rs 110. It is quite
logical since price depends on expected dividend and future growth opportunities.
Problem 21
Bajaj has the highest current share price but it also pays maximum dividend (as a percentage of its earnings). On the other hand, Maharashtra Scooters
EPS, lowest payout, lowest dividend yield and it is ranked third in terms of share price. Hero Honda has lowest EPS and lowest share price. Kinetic ra
in terms of EPS, DPS and share price. It appears that the market is giving consideration to the companies current performance as well as future growt
Problem 22
Problem 23
r= g / b=. 12/ . 6
Value of growth opportunities: 10.70
Problem 24
Problem 25
Problem 26
Problem 27
Problem 28
Problem 29
[ { ( ) }]
10
1 1 . 09
5. 45 1 37.68
0 .150 . 09 1 . 15
5. 4516 . 670 . 4148=Rs 37 . 68
PV (Rs) 6% PV (Rs)
107.14 0.943 113.21
95.66 0.890 106.80
85.41 0.840 100.75
76.26 0.792 95.05
68.09 0.747 89.67
60.80 0.705 84.60
54.28 0.665 79.81
452.35 0.627 702.70
1000.00 1372.59
16%
PV PVF PV
432.57 3.274 392.92
567.43 0.476 476.11
1000.00 869.03
8%
PV PVF PV
441.61 6.710 402.60
558.39 0.463 463.19
1,000.00 865.80
4%
PV PVF PV
892.65 13.590 815.42
553.68 0.456 456.39
1,446.32 1,271.81
114.87
PV (Rs)
3.05
3.11
3.17
3.08
3.00
2.91
18.32
89.50
50.52
68.84
Payout Earnings Dividend
yield yield
0.420 0.0433 0.0182
0.216 0.0756 0.0163
0.208 0.0676 0.0141
0.124 0.0980 0.0122
3 year bond
(i) Annual yield
10 10 10+100
110= + + =6 . 24
1+ y (1+ y)2 (1+ y)3
(ii) Half-yearly yield
5 5 5 5 5 5+100
110= + + + + + =3. 15
1+ y (1+ y) (1+ y) (1+ y ) (1+ y ) (1+ y)6
2 3 4 5
4 year bond
(i) Annual yield
10 10 10 10+100
115= + + + =5 . 70
5 5 5 5+100
100= + + + =5
1+ y (1+ y) (1+ y) (1+ y )4
2 3
3 year bond
(i) Annual yield
10 10 10+100
110= + + =6 . 24
1+ y (1+ y)2 (1+ y)3
(ii) Half-yearly yield
5 5 5 5 5 5+100
110= + + + + + =3. 15
1+ y (1+ y) (1+ y) (1+ y ) (1+ y ) (1+ y)6
2 3 4 5
4 year bond
(i) Annual yield
10 10 10 10+100
115= + + + =5 . 70
1+ y (1+ y) (1+ y) (1+ y )4
2 3