CHAPTER 9

Debt Valuation and Interest Rate

 Soal (bonds)
Arizona Public Utilities issued a bond that pays $80 in interest,
with a $1000 par value. It matures in 20 years. Your required rate
of return is 7 percent.

a. Calculate the value of the bond.

b. How does the value change if your required rate of return (i)
increases to 10 percent or (ii) decreases to 6 percent?
c. Explain the implications of your answers in part (b) as they
relate to interest rate risk, premium bonds, and discount bonds.
d. Assume that the bond matures in 10 years instead of 20
years. Recompute your answers in part (b).
e. Explain the implications of your answers in part (d) as they
relate to interest rate risk, premium bonds, and discount bonds
 a. N=20, I=7%, PYMT=$80, PV= , FV= $1000
Solve for PV, using my RRR, PV= $1,105.94
 Current If RRR increases If RRR
decreases
7% 10% 6%
Yang lain tetap konstan, kecuali RRR (i) dan PV,
memecahkan PV di masing-masing,
memberikan
$1105.94 $829.73 $1,229.40
 c. Ketika suatu obligasi membayar tingkat kupon yang lebih rendah
dari tingkat yang diperlukan pengembalian, nilainya menurun, dan
penerbit obligasi harus diskon harga obligasi untuk memberikan
nilai pasar. Ketika suatu obligasi membayar tingkat kupon yang
lebih tinggi dari tingkat yang diperlukan pengembalian, pembeli
obligasi akan harus membayar premi di atas nilai nominal untuk
mendapatkan pengembalian yang lebih tinggi.
 d. N=10, I=7%,10%,6%, PYMT= $80, PV= , FV=$1000

PV, 7% RRR=$1070 PV, 10% RRR= $877 PV,6%= $1147

 e.Semakin lama periode obligasi hingga jatuh tempo, semakin risiko
suku bunga investor terkena, sehingga ikatan dengan waktu yang
lebih singkat hingga jatuh tempo akan memiliki premi yang lebih
tinggi, jika semua variabel lainnya adalah sama.
Stock Valuation
Soal (Common Stock Valuation )

 The investor’s required rate of return of 13.5%,

 The expected level of earnings at the end of this year (E1) is $6.00,
 The retention ratio is 50%,
 The return on equity (ROE) is 15% (that is, it can earn 15% on reinvested
earnings), and
 Similar shares of stock sell at multiples of 16.667 times earnings per
share

Questions:
a. Determine the expected growth rate for dividends.
b. Determine the price earnings ratio (P/E1).
c. What is the stock price using the P/E ratio valuation method?
d. What is the stock price using the dividend discount model?
e. What would happen to the P/E ratio (P/E1) and stock price if the
company increased its retention rate to 60% (holding all else constant)?
What would happen to the P/E ratio (P/E1) and stock price if the company
paid out all its earnings in the form of dividends?
f. What have you learned about the relationship between the retention rate
and P/E ratios?
 a.Rate of growth in dividends(g) = retention
ratio(b) x ROE
= 0,50 x 0,15 = 0,075 = 75%
 b.Price earning ratio = similar stock = 16,667
(P/E1)
 c.Stock price using P/E ratio valuation
method
Vcs = P/E1X E1 = 16,667 x $6 = $100
 d.Stock price using dividend discount model
D1 = E1 x ( 1 – rejention ratio) = $6 x (1-0,5)
= $3
 Ycs = D1/ (Rcs - g) = $3 / (0,135 – 0,075) = $50
 (a.)Rate of growth in dividends = 0,6 x 0,15= 9%
D1 = E1 x (1-rejention ratio) = $6 x (1-0,6)=
$2,40
Vcs = D1 / (Rcs - g) = $2,4 / (0,135–0,075)=
$53,33
(b.)Rate of the growth in dividens = 0x0,15 = 0%
D1 = E1 x (1-rejention ratio) = $6 x (1-0)= $6
Vcs = D1 / (Rcs - g) = $6/ (0,135–0,075)=
$44,44
 f. Asumsi recuired rate of return > dividend
growth rate maka :
◦ Jika lebih tinggi retention rate, maka hal lain akan sama
◦ Jika lebih tinggi value of common stock maka price
earnings ratio akan lebih tinggi juga