Lyceum of the Philippines University- Cavite

Engineering Economy
April 15, 2020 Wed.

Lecture / Activity 1 CV19

EECN41E Engineering Economy

Time/Day/Section 10:00AM-11:30AM / W / ENG 107
1:00PM- 2:30PM / W / ENG 104
2:30PM- 4:00PM / W / ENG 105

Lecture

Example:

1. At present common stocks for Go Co. paid dividends of P38.00 per share. The company has been
growing at a steady rate of 8% per year, and stocks are now priced at P4 000.00 per share. If an
investor buys now and holds on to his shares for three years where he expects the market price to
increase by 31%, determine the rate of return to be realized from his venture.

Given: Div0 = P38.00 g = 8% P = P4 000.00 n = 3 years

Required: rate of return, ic
Solution:
R = (1+0.31)(4 000) = 5 200

P = Div0(1+g)(1+ic¿−1 + Div0(1+g¿2(1+ic¿−2 + R(1+ic¿−n

4 000 = 38(1+0.08)(1+ic¿−1 + 38(1+0.08¿2(1+ic¿−2 + 5 200(1+ic¿−2

Solve ic by trial and error, try ic = 15%

2. A P500 000.00 bond with a rate of 9% payable quarterly may be purchased for
P475 000.00. If it may be redeemed after nine years, determine:
a. the current yield
b. the equivalent rate of interest
c. the bond’s yield to maturity

Given: R = F = P500 000.00 rn = 9% m=4 P = P475 000.00

Required: a. current yield, y

b. rate of interest, i
c. bond’s yield to maturity, ie

Solution: a. r = rn / 4 = 9/4 = 2.25% n = 9(4) = 36

 I = mFr = 4(500 000)(0.0225) = 45 000

y = I /P = 45 000/475 000 = 0.095 = 9.5%

b. P = R(1+i¿−n + Fr [¿ ¿ ]

475 000 = 500 000(1+i¿−36 + 500 000(0.0225) [¿ ¿ ]

Solve I by trial and error, try 2.22%

c. ie = (1+i¿m - 1 = (1+ i¿ 4 - 1 =

Use the value of I, the result from b.

Activity 1 CV19:

1. An investor desire to purchase shares of common stock in a blue chip corporation. He expects
dividend payoffs of P20.00 at the end of the first year, P25.00 at the end of the second year, and
P30.00 at the end of the third year. He also expects the market price of the stock to increase to
P800.00 at the end of the third year. Determine the maximum price he should pay for a share to
realize a minimum rate of return of 19%.
2. A P 100 000.00 bond with a rate of 11% payable annually is to be redeemed at par value after six
years. Determine the selling price to yield 9%.