SECURITY VALUATIONS

(Capital Markets)
 Value of Redeemable Bonds

n
Vb =  C + PV
t=1
(1 + i)t ( 1 + i )n
Where:
i = yield or RRR
PV = par value or face value
C = Annual coupon
 Value of Redeemable Bonds

QUESTION
A company has a $1000, 7% 20-year bond
with 11 years to maturity. The bond is trading
at a yield of 13% per year. Calculate the value
of the bond.
BOND VALUE WITH SEMI-ANNUAL COUPONS

nx2
Vb =  Ct/2 + PV
t=1 t nx2
(1+i/2) ( 1+i/2 )
 BOND VALUE: SEMI-ANNUAL COUPONS

ACTIVITY
Calculate the value of a 20-year bond that is
currently trading at a yield of 16% per year.
The bond has 15 years to maturity, a par value
of $1000 and a coupon rate of 18% pa,
payable semi-annually.
 ACTIVITY
A company has in issue a bond with the
following characteristics:
1. Par value = $1 000
2. Annual coupon = 20% payable semi-
annually.
3.Years remaining to maturity = 20 years.
4.Current yield to maturity = 26%.
• CALCULATE THE VALUE OF THE BOND
VALUATION OF EQUITY
 COST OF EQUITY = RRR
• The return that is expected by the investor is
also known as the required rate of return.
• This is the minimum return that investors
expect to receive, given the risk attached to
the company’s expected cash flows and the
return that they could obtain from alternative
investments of similar risk.
 HOLDING PERIOD RETURN (HPR)

If an investor decides to hold a security for a certain period of

time this return is called the holding period return (HPR).

HPR = CAPITAL GAINS YIELD + DIVIDEND YIELD

P1 - P0 D1
+
P0 P0

Where: P1 is the price at the end of the period,

P0 is the price at the beginning of the period.
D1 is the dividend paid during the period
 Gordon's Dividend Model

P0 = D1

ke - g
Where:
P0 = The PV of a share
g = Expected growth rate in dividends
D1 = The dividend expected next year, thus
D1 = D0 (1+g), where D0 is the dividend paid this
year.
ke = RRR on the company’s equity
 CAPITAL ASSETS PRICING MODEL
Ke = Rf + ( Rm - Rf )
WHERE:
Rf = Risk-free rate of return (T-bill rate)
Rm = Average return on the market
 = Beta coefficient
 Beta Coefficient
• A measure of the volatility of the returns on
the security in relation to average returns on
the market, such as the stock exchange index.
• Eg, if a share has a beta coefficient of 0.80 and
the market index is expected to go down by
20%, the returns on the share will be expected
to go down by 20 x 0.80 = 16% and vice
versa.
 Calculating the value of a share
P0 = D1

ke – g

A company has paid a dividend of 13 cents per

share. The dividends are expected to grow at a
rate of 7% per year and the RRR on the
company's equity is 11%.
CALCULATE THE VALUE OF THE SHARE
 Calculating the value of a share using
CAPM.
ACTIVITY
Company X Ltd has just paid a dividend of 120
cents per share. The dividends have been
growing at a rate of 8% per year and this growth
rate is expected to be maintained into the
future. The return on the stock market index is
16% and the T-Bill rate is currently 11%. The
beta coefficient for X Ltd's shares is 0.78.
Calculate the expected share price.
 Value of Irredeemable Preferred Share

P0 = Annual Dividend
kp
 Value of Irredeemable Preferred Share

EXAMPLE
A Ltd has preferred stock outstanding with a par
value of $1 000 and a dividend of 15% per
year.
The required rate of return on this stock is 20%.
Calculate the value of the preference shares