1. Consider two 20 years bond with annual coupon payments. Bond A has an 8 percent coupon...
Question:
1. Consider two 20 years bond with annual coupon payments. Bond A has an 8 percent coupon rate and bond B has a 4 percent coupon rate. If the market yield to maturity is 5 percent:
i. Calculate the price of each bond assume aRM100,000 face value.
ii. Identify whether the bonds was traded at premium, par or discount.
A bond with 10 years to maturity with a coupon rate of 8 percent has a par value of RM100,000. Coupon for the bond is paid semi-annually. If the market required rate of return is 10 percent, calculate the value of this bond.
Consider a 15 years, zero-coupon bond with a yield to maturity of 6 percent. If the bond is issued with a face value of RM50,000. Calculate the price of the bond.
2. i. Lucas is considering to buya share from a company. He estimated his cost of equity to be 14 percent. Calculate how much should he pay for the share if the company promises the following:
ii. Constant dividend of RM1.50 per share every year.
Constant growth in dividend of 10 percent indefinitely, and last year dividend is RM1.80 per share.
MicaSdnBhd expects to grow at current rate of 10 percent per annum for the next 2 years and then at 8 percent per annum indefinitely thereafter. Calculate current share price of MicaSdnBhd assuming rate of return on equity is 12 percent per annum and last year dividend is RM1.00 per share.
3. DewberrySdnBhd, a manufacturer of safety casing and equipment, wants to choose the better of two investments, A and B. Each requires an initial outlay of RM10,000 and each has a most likely annual rate of return of 15 percent. Management has estimated returns associated with each investment's pessimistic and optimistic outcomes.
The three estimates and probability for each asset, are given in the following table:
Returns (%) | Probability | |
Asset A: | ||
Pessimistic | 13 | 0.25 |
Most likely | 15 | 0.50 |
Optimistic | 17 | 0.25 |
Asset B: | ||
Pessimistic | 7 | 0.25 |
Most likely | 15 | 0.50 |
Optimistic | 23 | 0.25 |
For both asset:
i. Calculate the expected return.
ii. Calculate the volatility of risk.
iii. Explain, which of the two investments you would choose.
4. You are concern on your retirement plan, therefore you meet up with your best friend who is currently the Director in an Investment Bank. Based on your discussion, your friend suggest you to invest in the bank investment package that offers the following returns:
Investment amount | Return |
1st RM40,000 | 20 percent |
2nd RM40,000 | 17 percent |
3rd RM40,000 | 14 percent |
4th RM40,000 | 11 percent |
5th RM40,000 | 8 percent |
You noticed that you have RM200,000 fixed deposit maturing that you should be able to use for the retirement plan. However, you also have to pay for an house renovation that you did last month. The renovation cost you RM100,000. Current rate of interest is 10 percent per annum.
Based on the Fisher's Separation Theorem:
i. Determine how much should you invest.
ii. Calculate the optimise return 1 year later.
5. PomelySdnBhd is evaluating the data for two projects as follows:
Project A (RM) | Project B (RM) | |
Initial Investment | 21,000 | 22,500 |
Year | Operating Cash Inflow | |
1 | 7,000 | 14,000 |
2 | 7,000 | 6,000 |
3 | 7,000 | 5,000 |
4 | 7,000 | 5,000 |
5 | 7,000 | 5,000 |
For each project, calculate the following capital budgeting techniques:
A. Accounting Rate of Return (Assume salvage value = 0)
B. Payback Period
C. Net Present Value (Use cost of capital = 10 percent)
D. Profitability Index (Use the same cost of capital in (c) above)
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta