Bangladesh University of Professionals

Assignment # 02
Corporate Finance

Submitted to: Md. Nahid Alam

Assistant Professor
Department of Finance and Banking
Bangladesh University of Professionals

Submitted by: Muntaqa Akhyar Noor

Section: A
Department of Finance and Banking, Batch 2020
Bangladesh University of Professionals

Final date of submission: 21 Feb 2023

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Question 01
120
Price= =$ 2,105.26
0.057

Question 02
Discount rate 5%

PV X =
(
5,500
0.05
1−
1
)
1.05
9
=39,093.02

0.05 ( 1.05 )
8,000 1
PV =
Y 1− =34,635.81
5

Investment X has higher present value.

Discount rate 22%

PV X =
(
5,500
0.22
1−
1
)
1.22
9
=20,824.57

PV =
Y
8,000
0.22 ( 1−
1.22 )
1
=22,909.12
5

Investment Y has higher present value.

Question 03

( ) −1=0.1058
12
0.101
EAR FNB = 1+
12

=(1+
2 )
2
0.104
EAR FUB −1=0.1067

First National Bank charges a lower borrowing rate.

Question 04

18,400=
600
0.009 (
1−
1
1.009
n )
solving for n=36 months∨3 years
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Question 05

(( ) −1)=1,582,341.54
360
700 0.10
FV stock = 1+
0.10 12
12

(( ) −1)=301,354.51
360
300 0.06
FV bond = 1+
0.06 12
12
∴ Total amount reinvested =1,883,696.05

( )
x 1
1,883,696.05= 1−
( )
300
0.08 0.08
1+
12 12

Solving for x ( periodic withdrawal )=$ 14,538

Question 06
215,000 1
PV = × =3,257,575.75
0.10−0.04 1.10

Question 07
3,000
FV = ( ( 1+ 0.09 )40−( 1+0.04 )40 ) =1,596,504
0.09−0.04

Question 08

PV 1=126,000+
( 0.10 )
126,000
1−
1
1.10
30
=1,313,791

0.10 ( 1.10 )
90,000 1
PV =530,000+
2 1− =1,378,422 30

∴ Select 2 nd option
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Question 09

( )
365
0.05
EAR= 1+ −1=5.127 %
365

Time Salary PV
0 7,500,000 7,500,000
1 4,200,000 3,995,177
2 5,100,000 4,614,702
3 5,900,000 5,078,229
4 6,800,000 5,567,445
5 7,400,000 5,763,224
6 8,100,000 6,000,751
Total PV 38,519,530
Increase in contract value 750,000
Immediate Signing bonus (9,000,000)
New PV 30,269,530

( )
365/ 4
0.05
EAR ( quarterly )= 1+ −1=1.258 %
365

PV =30,269,350=
x
0.01258
1−
( 1
1.01258
24 )
Solving for x ( quarterly pmt )=$ 1,469,040

Question 10

PV =
65,000
0.15 (
1−
1
1.15
7 )
=$ 270,427.3
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PV 270,427.3
PI = = =1.42
Investment 190,000
PI > 1, Hence, accept.

Question 11
Year Project I PV I Project II PV II
0 (40,000) (40,000) (15,000) (15,000)
1 21,000 19,091 8,500 7,727
2 21,000 17,355 8,500 7,025
3 21,000 15,778 8,500 6,386
NPV 12,224 6,138
PI 1.31 1.41

Based on PI, Project II should be chosen.

Based on NPV, Project I should be chosen.
Though Project I has a lower PI, its NPV is huge. This is due to the scaling problem of PI. Small figures
often higher return in relative terms. But Project I gives better absolute return.

Question 12
57 m 9 m
NPV =−32 m+ − =12.38 m
1.10 1.10 2

The project has a positive NPV 12.38m, hence it may be accepted.

57 m 9 m
NPV =0=−32m+ −
IRR IRR 2

Solving for IRR=17.5 %∨160 %

The acceptance of the project cannot be determined based on IRR.

Due to the mixed nature of the cashflows, IRR yields two possible values.

Question 13
Year Cashflow New Cashflow PV @ 11%
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Reinvested at 4%
0 (750,000) (750,000) (750,000)
1 205,000
2 265,000 213,200 173,038
3 346,000 275,600 201,516
4 220,000 359,840 237,038
5 228,800 135,782
NPV (2,626)
IRR 13.84%
MIRR 10.88%

IRR and MIRR are not the same. This is because of the reinvestment assumption of the IRR. MIRR shows
more realistic results because, the cashflows had to be reinvested at 4% with the government.

Question 14

Price=
84
0.076(1−
1
1.076
15)+
1,000
1.076
15
=$ 1,070.18

Question 15
When bonds are priced at par value, YTM equals coupon rate i.e., 8%.
Let’s assume the par value to be $1,000.
Bond 1 has 2 years until maturity.
Bond 2 has 15 years until maturity.

When interest rate rises by 2%

Bond 1=
40
0.05 (
1−
1
1.05
4
+
)
1,000
1.05
4
=$ 964.5

The price for Bond 1 has fallen by $35.5 (3.55%)

Bond 2=
40
0.05 (
1−
1
1.05
30
+
)1,000
1.05
30
=$ 846.2

The price for Bond 2 has fallen by $153.8 (15.38%)

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When interest rate falls by 2%

Bond 1=
40
0.03 (
1−
1
1.03
4 )
+
1,000
1.03
4
=$ 1,037

The price for Bond 1 has fallen by $37 (3.7%)

Bond 2=
40
0.03 (
1−
1
1.03
30)+
1,000
1.03
30
=$ 1,196

The price for Bond 2 has fallen by $196 (19.6%)

Long-term bonds have high interest rate risk compared to short-term bonds. This is because, when
interest rates rise, demand for the bond with a fixed coupon declines causing the price to fall and vice-
versa.

Question 16
Let par value be $1,000.

Bond P=
90
0.07 (
1−
1
1.07
5 )
+
1,000
1.07
5
=$ 1,082

90
Current yield of Bond P= =8.32%
1,082
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Bond D=
50
0.07
1−
( 1
1.07
5
+
1,000
1.07
5 )
=$ 918

50
Current yield of Bond D= =5.45 %
918
After 1 year

Bond P=
90
0.07(1−
1
1.07
4
+
1,000
1.07 )
4
=$ 1,067

−15
Capital gain of Bond P= =−1.38 %
1,082

Bond D=
50
0.07
1−
( 1
1.07
4
+
1,000
1.07
4 )
=$ 932

14
Capital gain of Bond P= =1.5 %
918

As the bonds get closer to their maturity, the prices get closer to their par value.
Hence, the price of bonds sold at premium falls gradually causing capital loss.
Price of bonds sold at discount rises leading to capital gain.

Question 17

Bond M =
800
0.04 (
1−
1
1.04
16 )+ 1,000
0.04 (
1−
1
1.04
12 ) + 20,000 =$ 13,118
12 28 40
1.04 1.04 1.04

20,000
Bond N= 40
=$ 4,165.7
1.04