MGT 201 FINANCIAL MANAGEMENT ASSIGNMENT

Question no; 1
Solution:
Bond present value formula:
BP = C/k* [1 – {1 / (1 + i/k)}] / (I /k) + FV / (1 +i/k) n*k
Where
N = number of year = 5
I = market rate, required rate = 14% or 0.14
K = number of coupon payment in one year = 2
P = value at maturity, or pay value= 1000

For C first we find Coupon Value

C (coupon payment) = Face value * coupon rate = 1000 * 12%
= 1000 * 12/100 = 120
BP = 120/2 [1 – { 1 / (1+ 0.14 / 2)5*2}] + 1000 / (1+ 0.14)5*2
BP = 60 [1 – { 1 /(1+ 0.07)10}] + 1 / ( 1+ 0.07) 10
BP = 60 [ 1 – { 1/ 1.967}] / 0.07 + 1000/ 1.967
BP = 60 * 1 – 0.5083 / 0.07 + 1000 / 1.967
BP = 60 * 0.4917 / 0.0700 + 508.35
BP = 60 * 7.02 + 508.35
BP = 929.76 ANSWER

Question No; 2
Dividend Growth Rate = D2 / D1 – 1
Where,
D 1 = Dividend for first year = Rs. 6 ,
D2 = Dividend for 2nd year = Rs. 7
Dividend growth Rate = 7 / 6 – 1 = 1.167 – 1 = 0.167
0.167 * 100 = 16.67% (Annual)
Here we given 2 years so = 2 years = 16.67 / 2 = 8.3% for each
Stock price calculating using dividend growth modal
Future dividend = Dividend x {1 + (growth rate / 100)}
FD = 54 x {1+ (8.3 /100)}
FD = 54 x (1+ 0.083)
FD = 54 x 1.083
FD = 58.40
Rate Difference = Required rate – Growth Rate
Rate difference = 0.140 – 0.083 = 0.057
Stock Price = future Dividend / Rate difference
Stock Price = 58.40 / 0.057 = 1025.96 Answer

Question number 3:
If the intrinsic value of an asset is less than its market value, the assets among investors is
perceived as undervalue otherwise it is over value.
Here current market price of bound = Rs. 940
Intrinsic value (present value) of bound = Rs. 929.96
So intrinsic value of bond is less the its current market value it is ‘‘undervalued’’
If the P/E Ratio is higher than the growth rate, the stock may be overvalued otherwise
undervalued
Stock price (present value of stock) = Rs. 1025.96
EPS = Rs. 54
P/E = 1025.96 / 54 = Rs. 18.1
Dividend Growth Rate = 8.3%
On the other hand, If the P/E ratio is higher than the growth rate so the stock is overvalued.