TUTORIAL – VALUATION OF BOND AND SHARES

1. On 31st March 2003, Hind Tobacco Company issues Rs 1,000 face value bonds due on 31 March 2013.
The company will not pay any interest on the bond until 3 March 2008. The half-yearly interest is
payable from 31st Dec 2008; the annual rate of interest will be 12 percent. The bonds will be redeemed
at 5% premium on maturity. What is the value of bond if the required rate of return is 14% per annum?

2. The share of Premier Limited will pay a dividend of Rs 3 per share after a year. It is currently selling at Rs
50, and it is estimated that after a year price will be Rs 53. What is the present value of the share if the
required rate of return is 10%? Also calculate the return on share if it is bought, and sold after a year.

3. The total assets of Rs 80,000 of a company are financed by equity funds only. The internal rate of return
on assets is 10%. The company has a policy of retaining 70% of its profits; the capitalization rate is 12%.
The company has 10,000 shares outstanding calculate the present value per share.

4. Satya Systems Company has made net profit of Rs 50 crore. It has announced to distribute 60% of net
profit as dividend to shareholders. It has 2 crore ordinary shares outstanding. The company’ share is
currently selling at Rs 240. In the past, it had earned return on equity of 25% and expects to maintain
this profitability in the future as well. What is the required rate of return on Satya’s share?

5. Gujarat Bijali Ltd. Has earnings of Rs 80 crore and it has 5 crore outstanding shares. It has a project that
will produce net earnings of Rs 20 crore after one year. Thereafter, earnings are expected to grow at 8%
per annum indefinitely. The company’s required rate of return is 12.5%. Find the P/E ratio.

TUTORIAL – VALUATION OF BOND AND SHARES

1. On 31st March 2003, Hind Tobacco Company issues Rs 1,000 face value bonds due on 31 March 2013.
The company will not pay any interest on the bond until 3 March 2008. The half-yearly interest is
payable from 31st Dec 2008; the annual rate of interest will be 12 percent. The bonds will be redeemed
at 5% premium on maturity. What is the value of bond if the required rate of return is 14% per annum?

2. The share of Premier Limited will pay a dividend of Rs 3 per share after a year. It is currently selling at Rs
50, and it is estimated that after a year price will be Rs 53. What is the present value of the share if the
required rate of return is 10%? Also calculate the return on share if it is bought, and sold after a year.

3. The total assets of Rs 80,000 of a company are financed by equity funds only. The internal rate of return
on assets is 10%. The company has a policy of retaining 70% of its profits; the capitalization rate is 12%.
The company has 10,000 shares outstanding calculate the present value per share.

4. Satya Systems Company has made net profit of Rs 50 crore. It has announced to distribute 60% of net
profit as dividend to shareholders. It has 2 crore ordinary shares outstanding. The company’ share is
currently selling at Rs 240. In the past, it had earned return on equity of 25% and expects to maintain
this profitability in the future as well. What is the required rate of return on Satya’s share?

5. Gujarat Bijali Ltd. Has earnings of Rs 80 crore and it has 5 crore outstanding shares. It has a project that
will produce net earnings of Rs 20 crore after one year. Thereafter, earnings are expected to grow at 8%
per annum indefinitely. The company’s required rate of return is 12.5%. Find the P/E ratio.