PDA

View Full Version : MGT201 Financial Management Assignment 2 Deadline 1 July 2010

viki
06-26-2010, 07:44 AM
Question 1: 10 marks
Given the following information for the stock of Foster Company, calculate its beta.

413

Question 2: 20 marks

ABC Company is considering investing in either of the two outstanding bonds. Both bonds have Rs.2,000 par values and 10% coupon interest rates and pay annual interests. Bond A has exactly 3 years to maturity, and bond B has 5 years to maturity.
a) Calculate the value of bond A if the required rate of return is 14%.
b) Calculate the value of bond B if the required rate of return is 14%.
c) If ABC wants to minimize the Interest Rate Risk, which bond should be purchased? Why.

viki
06-26-2010, 06:08 PM
Idea Solution For Question 2

NPV Bond Pricing Equation: vu handout page#123
Bond Price = PV = C1/ (1+rD) + C2/ (1+rD) t2+ C3 / (1+rD)t3 +.. + PAR / (1+rD)n3

Where

Pv = Bound value
C= Coupon payment Pa = 2000*10.100= 200 C1 ...C2 For each year
rD= Required rate of return = 14%=0.14
PAR = Par value or face value= 2000
Maturity period
Bound A = t 3 n3
Bound B = t 5 n5

viki
06-28-2010, 10:16 AM
Idea Solution Of Question 1
Question stock beta#1
Vu handout page#105

Average Required ROR for all rational investors in an Efficient Market can be estimated using the CAPM Theory: Beta and Risk Free Rate of Return.
Total Rate of Return (ROR) for Single Stock = Dividend Yield + Capital Gain. GORDON’S FORMULA FOR COMMON STOCK PRICING OR VALUATION USES REQUIRED RETURN r = DIV/Po + g. In Efficient Markets, Price of Stocks is based on Market Risk (or Beta). We can formulate the required rate of return in terms of Beta risk so how can we use beta coefficient to calculate the required rate of return for the average investor in the market. The answer to it is the

Vu handout page # 114

Po* = DIV1 / [ (rRF + (rM - rRF ) βA ) - g]

Where
Po*=80
DIV1= 5
g= 7%
rRF = 6%
rM = 10%
βA ) ?
Now put the values and get answer which is = βA 1.8125

mc090407744
06-30-2010, 05:15 PM
please clculations b post krain Question no 2 ki plzzzzzzzzzzzz jaldiiii

viki
06-30-2010, 10:42 PM
please clculations b post krain Question no 2 ki plzzzzzzzzzzzz jaldiiii

sab wali he hia sab kuch khud he karna perha ga kiya

Guru
07-01-2010, 05:09 PM
MGT201 Assignment 2 Solution

Question#1 solution:

ROR = D1V1 / P0 + g
ROR = (5/80) + 0.07
ROR = 0.0625 + 0.07
ROR = 0.1325*100
ROR = 13.25%

rA = rRF + (rM - rRF) beta
rA= 13.25%
rRF = 6%
rM = 10%
Beta = ?

13.25% = 6% + (10% - 6%) beta
13.25% - 6% = (4%) beta
7.25% = (4%) beta
Beta = 7.25%/4%
Beta = 1.8125

Solution Q # 2 (Bond Valuation)

a) Given Data (Bond A):
Coupon payment per annum (C) = 2000*10%= 2000* 0.1 = 200
Required rate of return (rD) = 14% = 0.14
Par value or face value (PAR) = 2000
Maturity Period or Term = 3 Years
Bond Price (PV) =?

We know that:
PV = C1/ (1+rD) + C2 /(1+rD) 2 + C3 / (1+rD)3 + PAR / (1+rD)3
PV = 200/ (1 + 0.14) + 200/ (1 + 0.14)2 + 200/ (1+ 0.14)3 + 2000/ (1 + 0.14)3
PV = (200/1.14) + (200/ 1.2996) + (200/1.4815) + (2000/ 1.4815)
PV = 175.4386 + 153.8935 + 134.9983 + 1349.9831
PV = 1814.3135 (Bond A)

b) Given Data (Bond B):
Coupon payment per annum (C) = 2000*10%= 2000* 0.1 = 200
Required rate of return (rD) = 14% = 0.14
Par value or face value (PAR) = 2000
Maturity Period or Term = 5 Years
Bond Price (PV) =?

We know that:
PV = C1/ (1+rD) + C2 /(1+rD) 2 + C3 / (1+rD)3 + C4/(1+rD)4 + C5/(1+rD)5+ PAR / (1+rD)5PV = 200/ (1+ 0.14) + 200/(1+0.14)2 + 200/(1+0.14)3 + 200/ (1+0.14)4 + 200/(1+0.14)5
+2000/(1+0.14)5
PV = (200/1.14) + (200/ 1.2996) + (200/1.4815) + (200/1.6889) + (200/1.9254) + 2000/1.9254
PV = 175.4386 + 153.8935 + 134.9983 + 118.4203 + 103.8745 + 1038.7452
PV = 1725.3704 (Bond B)
c) If ABC wants to minimize the Interest Rate Risk, which bond should be purchased? Why?