MGT411 Assignment2 Idea Solution July 2010

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MGT411 Assignment#2 Idea Solution.

Question#1 Solution:
Bond Valuation

Part a)
Bond value = c [1 – 1/(1+r)^n / r] + Par/(1+r)^n
Bond value = 90 [1 – 1/(1+0.10)^12 / 0.10 + 1000/(1+0.10)^12
Bond Value = 90 [1 – 0.3186 /0.10] + 1000/3.1384
Bond value = 90 (6.814) + 318.63
Bond value = 613.26 +318.63
Bond Value = 931

Part b)
Bond value = c [1 – 1/(1+r)^n / r] + Par/(1+r)^n
Bond value = 45 [1 – 1/(1+0.05)^24 / 0.05 + 1000/(1+0.05)^24
Bond Value = 45 [1 – 0.3100 /0.05] + 1000/3.2250
Bond value = 45 (13.8) + 310.07
Bond value = 621 +310.
Bond Value = 931

Part a)
P = Div(1+g)/rF +rP – g

D = 1.80
Rce = rF +rP = 12% \
g = 5%

P = 1.80 (1+0.05) / 12% - 5%
P = 1.80 (1.05) / 7%
P = 1.89/0.07
P = 27

Part b)
Div1= Do(1+g)3
Div1= 1.80 (1+0.05)3
Div1= 1.80 (1.1576)
Div1 = 2.083

P0 = D0 x (1 + g)/(R – g)
P0= 2.083 x 1.04/(0.12 – 0.04)
P0= 2.166 / 0.08
P0= 27.075


Question 2 Solution


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QUESTION # 1: (Marks 20)
Mr. Toseef, the Chief Financial Officer of a mutual fund Company, was given the task to ascertain
the firm’s bond and stock values. To perform the necessary analysis, Mr. Toseef gathered the
following relevant data on the firm’s bonds and stocks.
BONDS: The firm has a Rs. 1,000 par value bond with a 9 percent coupon interest rate outstanding.
The bond has 12 years remaining to its maturity date.
STOCKS: The firm’s common stock currently pays an annual dividend of Rs. 1.80 per share. The
required return on the common stock is 12 percent.
REQUIRED:
Bonds:
A. If interest is paid annually, what is the value of the bond when the required stated return is 10 percent
B. Using the 10 percent required return, find the bond’s value when interest is paid
semiannually
Stock:
Estimate the value of common stock under each of the following dividend-growth-rate
assumptions:
A. Dividends are expected to grow at a constant annual rate of 5 percent to infinity.
B. Dividends are expected to grow at an annual rate of 5 percent for each of the next 3
years followed by a constant annual growth rate of 4 percent in years 4 to infinity.


QUESTION # 2 (Marks 10)
A commercial bank has following data:
Total assets valued Rs. 1,000,000


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Required
What will be the net interest profit increase / decrease due to the interest rate change your
answer should be in absolute amount.