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Problem 1
(1) 1-year government bond maturity value (Rs)
Market rate of interest
PV of the bond: 1,000/1.08 (Rs)
(2) Purchase price of bond (Rs)
Implied return: (1,000 904.98)/904.98
1,000
8%
925.93
904.98
10.50%
Problem 2
Perpetual interest (Rs)
Current yield
Price of bond (B) (Rs): 140/0.13
Required rate
New price of bond (B) (Rs) : 140/0.15
140
0.13
1076.92
0.15
933.33
Problem 3
Face value (Rs)
Annual interest (Rs)
Maturity (years)
Maturity value (Rs)
Required rate
PVAF, 10 year
PVF, 10 year
PV of interest (Rs)
PV of maturity value (Rs): (d x g)
PV of 10-year debenture (Rs)
1000
140
10
1000
0.12
5.6502
0.3220
791.03
321.97
1113.00
n=10
0.14
5.2161
0.2697
730.26
269.74
1000.00
0.16
4.8332
0.2267
676.65
226.68
903.34
140t
1, 000
+
( 1 . 12)10
t =1 (1 . 12 )
140 PVAF. 12, 10 + 1, 000 PVF. 12, 10
1405 . 6502 +1, 000 0 .3220=Rs 1,113 . 00
PV of 10-year bond=
0.12
3.6048
0.5674
504.67
567.43
1072.10
0.14
3.4331
0.5194
480.63
519.37
1000.00
0.16
3.2743
0.4761
458.40
476.11
934.51
1000
0.16
160
800
1300
1000
0.20
0.123
0.16
Problem 4
Face value (Rs)
Interest rate
Interest (Rs): (1,000 x 0.16)
Price of bond, B0 (Rs)
Yield =
Problem 5
INT
B0
PVF
PVF
9% PV (Rs)
0.917
110.09
0.842
101.00
0.772
864.85
1075.94
12%
0.893
0.797
0.712
PVF 9% PV (Rs)
0.917
55.05
0.842
50.50
0.772
818.51
924.06
PVF 12%
0.893
0.797
0.712
9% PV (Rs)
0.917
110.09
0.842
101.00
0.772
92.66
0.708
85.01
0.650
77.99
0.596
71.55
0.547
65.64
0.502
562.09
1166.04
12%
0.893
0.797
0.712
0.636
0.567
0.507
0.452
0.404
PVF 9% PV (Rs)
0.917
55.05
0.842
50.50
0.772
46.33
0.708
42.51
0.650
39.00
0.596
35.78
0.547
32.82
0.502
531.98
833.96
PVF 12%
0.893
0.797
0.712
0.636
0.567
0.507
0.452
0.404
Problem 6
(1) Annual compounding: Annual interest rate 12%
Discount rate - annual
10%
Period Cash flow
PVF
1 to 5*
120
5
1,000
* Annuity factor
(2) Half-yearly compounding: Half-yearly interest rate 6%
Discount rate -half-yearly
Period
Cash flow
PVF
1 to 10*
60
10
1,000
12%
PV
3.791
0.621
PVF
454.89
620.92
620.92
3.605
0.567
5%
6%
PV
7.722
0.614
PVF
463.30
613.91
1,077.22
7.360
0.558
* Annuity factor
(3) Quarterly compounding: Quarterly interest rate 3%
Discount rate -half-yearly
2.50%
3%
Period
Cash flow
1 to 20
20
PVF
60
1,000
PV
PVF
15.589
0.610
935.35
610.27
1,545.62
14.877
0.554
Bond 2
14%
13%
15
100
7.00%
6.50%
30
13.0587
7
91.41
0.1512
15.12
106.53
100
14.00%
7.00%
Bond 3
12%
8%
20
100
6.00%
4.00%
40
19.7928
6
118.76
0.2083
20.83
139.59
110
10.76%
5.39%
Bond 4
12%
8%
10
100
6.00%
4.00%
20
13.5903
6
81.54
0.4564
45.64
127.18
115
9.60%
4.82%
* Annuity factor
Problem 7
Face value (Rs)
Maturity periods (half-yearly)
Half-yearly interest rate
Interest payment period
Maturity value (Rs)
Required rate (half-yearly)
Interest payment, 11 to 20 years (Rs)
Value of interest (Rs)
Value of maturity value (Rs)
Value of bond (Rs)
20
1,000
20
6%
10
1,050
7%
60.00
214.23
271.34
485.57
60 t
1,050
( 1. 07 )n
t =11 (1 . 07 )
60( PVAF20 , 7 PVAF10 , 7 ) +1, 050PVF 20 , 7
Value of bond=
Interest rate
Required rate of return
Maturity period (years)
Par/maturity value (Rs)
Semi-annual interest rate
Required rate of return (half-yearly)
Compounding periods
PVAF (annuity)
Half-yearly interest (Rs)
PV of interest (Rs)
PVF (lump sum)
PV of maturity value (Rs)
Bond value (Rs)
Current market price of bonds (Rs)
Annual yields (by trial & error)
Semi-annual yield (by trial & error)
Bond 1
16%
15%
25
100
8.00%
7.50%
50
12.9748
8
103.80
0.0269
2.69
106.49
95
16.86%
8.43%
Value of a bond that pays interest half-yearly can be calculated by the following equation:
2n
B 0 =
t =1
Problem 9
1
2
( INT t )
( 1+
kd
Bn
k
( 1+ d )2 n
2
Problem 10
120
12 t
t
( 1. 10 )
110
( 1. 10 )7
P=
3.00
50.00
53.00
0.10
DIV 1 + P 1
( 1 + k e )1
3+53
1 .1
50.91
Return on share:
r e=
12%
Problem 14
Share price (Rs)
Capitalisation rate
75.00
0.12
Year
0
1
2
3
4
4
DPS
(Rs)
7.50
7.50
9.00
15.00
70.00
Problem 15
Current share price
DPS
Growth rate
Required rate
Value of the share:
60.00
1.50
0.10
0.12
PVF
at 12%
0.8929
0.7972
0.7118
0.6355
0.6355
PV
(Rs)
6.70
5.98
6.41
9.53
44.49
73.10
DIV 1
ke g
1. 5( 1 .1 )
1 . 65
=
=82 . 50
0 .12 0 . 10
0. 02
P0 =
82.5
0.15
0.09
0.12
0.10
4.00
2.00
DPS
(Rs)
Year
0
1
2
3
4
5
6
7
PVF
@ 12%
2.00
2.30
2.65
3.04
3.50
4.02
4.63
5.32
0.8929
0.7972
0.7118
0.6355
0.5674
0.5066
0.4523
PV
(Rs)
2.05
2.11
2.17
2.22
2.28
2.34
2.41
15.58
P7 =
DIV 7 ( 1+ g n ) 5 . 32(1. 09 )
=
=Rs 579 . 88
k e g n
0. 100 . 09
PV of Rs 579.88
579.88
(Rs)
Current EPS
Retention ratio, b
Current DPS, DIV0 = EPS0(1 - b)
Rate of return, r
Required rate, ke
Current share price (Rs)
Growth, g = b x r
Expected EPS (Rs): EPS1 = EPS0(1+g) = 5 x 1.09
Expected DPS (Rs): DIV1 = DIV0(1+g) = 2 x 1.09
Expected retained earnings, RE1 = EPS1 - DIV1
Value of share if g = 0
P0 =
EPS 1
5 . 45
=
k e g
0 . 13 0
5
0.6
2
0.15
0.13
60
0.09
5.45
2.18
3.27
41.92
Value of share if g = 9%
P0 =
DIV 1
k e g
2(1+. 09 )
2 .18
=
0. 13. 09 0 .04
54.50
12.58
297.57
313.16
V g=
RE 1 ( rk e )
k e ( k eg )
12.58
Problem 18
Total assets (Rs)
Equity (Rs)
Number of shares
Equity per share: 80,000/10,000
Internal rate of return, r
Earnings: 10% 80,000
EPS
Capitalisation rate, k
Retention ratio, b
Dividend per share, DIV: 30% 8
Growth rate, g: b r
Expected DIV: 0.240 1.07
PV of share: 0.2568/(0.12 0.07)
80,000
80,000
10,000
8
10%
8000
0.8
12%
70%
0.24
7%
0.2568
5.14
Problem 19
Last year's DPS (Rs)
Current market price (Rs)
Required rate
Growth rate
Value of share (Rs)
3
80
0.1
Scenario 1:
Scenario 2:
No growth
Perpetual growth
Scenario 3:
Different
growth rates
0
0.06
3/.10= Rs 30 3(1.06)/.1 - .06 =Rs Rs 68.84
79.5
(see below)
0.12
0.07
0.04
DPS (Rs)
3.00
3.36
3.76
4.21
4.51
4.83
5.16
PVF
0.9091
0.8264
0.7513
0.6830
0.6209
0.5645
5.37
16.6667
0.5645
Problem 20
Current DPS (Rs)
Current growth rate
New growth
Capitalisation rate
Share price (Rs) if g = 5%, [5(1.05)/(0.15-.05)]
Year
0
1
2
3
4
5
6
5
0.05
0.1
0.15
52.5
110
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
Face value (Rs)
10
EPS (Rs)
Bajaj
Hero Honda
Kinetic
Maharashtra. Scooters
Dividend rate
11.9
10.2
12.0
20.1
0.50
0.22
0.25
0.25
Market price
(Rs)
275.0
135.0
177.5
205.0
DPS (Rs)
5.0
2.2
2.5
2.5
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 growth
Problem 22
DPS in year 0 (Rs)
DPS in year 10, (Rs)
Period (years)
Dividend growth rate: [(10.5/3.5)1/10 -1]
3.5
10.5
10
0.1161
75
0.0521
0.1682
Problem 23
Current EPS (Rs)
Growth
Payout
Retention ratio: 1 - .4
Capitalisation rate
DPS (Rs)
Expected EPS: 8.6 1.12
Expected dividend: 3.44 1.12
Expected retained earnings: 9.63 x 0.60
Share value (12% growth) (Rs)
Share value (no growth) (Rs)
Value of growth opportunities:
Firm's rate of return:
g= rb
r= g / b=. 12/ . 6
Value of growth opportunities:
V g=
RE 1 ( rk e )
k e ( k eg )
8.6
0.12
0.4
0.6
0.18
3.44
9.63
3.85
5.78
64.21
53.51
10.70
0.20
10.70
Problem 24
12%
debenture
1000
14%
debenture
Pref.
share
1000
100
Equity
share
100
12%
annual
12
12
1000
50
0.100
6.8137
0.3186
120
50
2
25
25%
12%
60%
40%
15
10%
16.5
240
6.88%
16.88%
Problem 26
Net earnings (Rs million)
Paid-up capital (Rs million)
Par value of share (Rs)
Number of shares: paid-up capital/par value of share
(mn.)
25
200
10
20
1.25
2%
10%
15.94
10
2
15
21.15
5.21
Problem 27
Earnings (without project) (Rs crore)
Number of shares (crore)
EPS: 80/5
Required rate of return
Share price (without project): 16/0.125
15%
annual annual
100
0.135
200
0.150
15
12
0.08
120 x 6.8137
70 x 11.4699
+ 1000 x .3186
+ 1000 x .3118 15/.135
12/(.15 - .08)
1136.27
1114.70
111.11
171.43
56.81
33.44
111.11
342.86
Problem 25
Net profit (Rs crore)
Number of shares (crore)
EPS: 50/2
ROE
Capitalisation rate, k
Payout
Retention ratio, b
Dividend per share, DIV: 60% 25
Growth rate, g: b r: 40% 25%
Expected DIV: 25 1.10
Current share price (Rs), P0
Expected dividend yield: DIV1/ P0
Capitalisation rate, k = (DIV1/ P0) + g
14%
half-yearly
10
20
1000
30
0.060
11.4699
0.3118
70
80
5
16
12.50%
128
20
4
8%
12.50%
88.89
216.89
20
10.84
Problem 28
Number of shares (million)
Net cash profits (Rs million)
Cash EPS: 80/10
Opportunity cost of capital
(a) (i) Retention ratio
Return on retained earnings
Growth: 40% 20%
Expected Dividend per share, DIV1: 8 (1 0.40) 1.08
Share price: 5.18/(0.20 0.08)
(a) (ii) Retention ratio
Return on retained earnings
Growth: 60% 20%
Expected Dividend per share, DIV1: 8 (1 0.60) 1.12
Share price: 3.58/(0.20 0.12)
(b) (i) Retention ratio
Return on retained earnings
Growth: 40% 24%
Expected Dividend per share, DIV1: 8 (1 0.40) 1.096
Share price: 5.26/(0.20 0.096)
(b) (ii) Retention ratio
Return on retained earnings
Growth: 60% 24%
Expected Dividend per share, DIV1: 8 (1 0.60) 1.144
Share price: 3.66/(0.20 0.144)
10
80
8
20%
40%
20%
8%
5.18
43.20
60%
20%
12%
3.58
44.80
40%
24%
9.60%
5.26
50.58
60%
24%
14.40%
3.66
65.37
Problem 29
Year
Cash EPS (perpetuity)
Payout
DIV
Opportunity cost of capital
(a) Share price: 10/0.15
(b) Expansion opportunity
Earnings retention
Rate of return
Growth: 50% 18%
DIV1: 5 1.09
Period of growth, years
Value of growth opportunity:
10
100%
10
15%
66.67
50%
18%
9%
5.45
10
0
1
2
3
4
5
6
7
8
9
10
EPS
10.00
10.90
11.88
12.95
14.12
15.39
16.77
18.28
19.93
21.72
23.67
DPS
5.00
5.45
5.94
6.48
7.06
7.69
8.39
9.14
9.96
10.86
11.84
V =DIV 1
5. 45
{ ( ) }]
{ ( ) }]
1
1+ g
1
kg
1+ k
1
1 . 09
1
0 .150 . 09
1 . 15
10
37.68
10
157.80
39.01
76.69
PVF
PV (Rs)
107.14
95.66
797.19
1000.00
6% PV (Rs)
0.943
113.21
0.890
106.80
0.840
940.37
1160.38
PV (Rs)
53.57
47.83
754.49
855.89
PVF 6% PV (Rs)
0.943
56.60
0.890
53.40
0.840
890.00
1000.00
PV (Rs)
107.14
95.66
85.41
76.26
68.09
60.80
54.28
452.35
1000.00
6% PV (Rs)
0.943
113.21
0.890
106.80
0.840
100.75
0.792
95.05
0.747
89.67
0.705
84.60
0.665
79.81
0.627
702.70
1372.59
PV (Rs)
53.57
47.83
42.71
38.13
34.05
30.40
27.14
428.12
701.94
PVF 6% PV (Rs)
0.943
56.60
0.890
53.40
0.840
50.38
0.792
47.53
0.747
44.84
0.705
42.30
0.665
39.90
0.627
665.06
1000.00
16%
PV
PVF
432.57
567.43
1000.00
PV
3.274
0.476
392.92
476.11
869.03
8%
PV
PVF
441.61
558.39
1,000.00
PV
6.710
0.463
4%
402.60
463.19
865.80
PV
892.65
553.68
1,446.32
PVF
PV
13.590
815.42
0.456
456.39
1,271.81
1-year bond
(i) Annual yield
10+100
95=
=15
1+ y
(ii) Half-yearly yield
5
5+100
95=
+
=7 . 8
1+ y (1+ y )2
2 year bond
(i) Annual yield
10 10+100
100=
+
=1
1+ y (1+ y)2
(ii) Half-yearly yield
5
5
5
100=
+
+
2
1+ y (1+ y) (1
3 year bond
(i) Annual yield
10 10
10
110=
+
+
2
1+ y (1+ y) (1
(ii) Half-yearly yield
5
5
5
110=
+
+
1+ y (1+ y)2 (1
4 year bond
(i) Annual yield
10 10
10
5
5
5
+
+
2
1+ y (1+ y) (1
3 year bond
(i) Annual yield
10 10
10
110=
+
+
2
1+ y (1+ y) (1
(ii) Half-yearly yield
5
5
5
110=
+
+
1+ y (1+ y)2 (1
4 year bond
(i) Annual yield
10 10
10
115=
+
+
1+ y (1+ y)2 (1
(ii) Half-yearly yield
5
5
5
115=
+
+
1+ y (1+ y)2 (1
100=
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
0.420
0.216
0.208
0.124
Earnings
yield
0.0433
0.0756
0.0676
0.0980
Dividend
yield
0.0182
0.0163
0.0141
0.0122
12/(.15 - .08)
1-year bond
(i) Annual yield
10+100
95=
=15
1+ y
(ii) Half-yearly yield
5
5+100
95=
+
=7 . 8
1+ y (1+ y )2
2 year bond
(i) Annual yield
10 10+100
100=
+
=10
1+ y (1+ y)2
(ii) Half-yearly yield
5
5
5
5+100
100=
+
+
+
=5
2
3
1+ y (1+ y) (1+ y) (1+ y) 4
3 year bond
(i) Annual yield
10 10
10+100
110=
+
+
=6 . 24
2
1+ y (1+ y) (1+ y)3
(ii) Half-yearly yield
5
5
5
5
5
5+100
110=
+
+
+
+
+
=3 . 15
1+ y (1+ y)2 (1+ y)3 (1+ y )4 (1+ y )5 (1+ y)6
4 year bond
(i) Annual yield
10 10
10
10+100
5
5
5
5+100
+
+
+
=5
2
3
1+ y (1+ y) (1+ y) (1+ y) 4
3 year bond
(i) Annual yield
10 10
10+100
110=
+
+
=6 . 24
2
1+ y (1+ y) (1+ y)3
(ii) Half-yearly yield
5
5
5
5
5
5+100
110=
+
+
+
+
+
=3 . 15
1+ y (1+ y)2 (1+ y)3 (1+ y )4 (1+ y )5 (1+ y)6
4 year bond
(i) Annual yield
10 10
10
10+100
115=
+
+
+
=5. 70
1+ y (1+ y)2 (1+ y)3 (1+ y )4
(ii) Half-yearly yield
5
5
5
5
5
5
5
5+100
115=
+
+
+
+
+
+
+
=2 . 87
1+ y (1+ y)2 (1+ y)3 (1+ y )4 (1+ y )5 (1+ y)6 (1+ y)7 (1+ y )8
100=