Work Finance

NATIONAL AUTONOMOUS UNIVERSITY OF NICARAGUA
(RUCFA)
SCHOOL OF ECONOMICS
DEPARTMENT OF PUBLIC ACCOUNTING AND FINANCE
BANKING AND FINANCE CAREER
GROUP 4531V, SABATINO
STUDENTS:
 FLORES URBINA LUISA AMANDA

 CANO PEÑA KEVIN RAÚL
MSC: ISOLIETH RIVAS
MANAGUA, SATURDAY, FEBRUARY 6, 2021
1
LEARNING ACTIVITIES
Activity 1. Questionnaire.
1) What is a bonus?
A Bond is a financial tool that is used to obtain financing, which are issued by companies and
governments through financial institutions in the form of titles or certificates through which
they promise to return to the buyer of the bond a specific amount of money over the long term.
term.
2) List the characteristics that distinguish a bond.

1. They have longer maturity periods than a bank loan.
2. The conditions of the bond loan are imposed by the debtor: he is obliged to periodically pay
interest at a certain rate stated in the title and to redeem it at an announced date.
3. There is a plurality of creditors that the debtor does not individualize, since when the
securities reach the secondary market, they change hands periodically.
4. Each obligation has a nominal value and can be issued at par, below par or above par,
depending on the price obtained in the placement.
3) How is the price of a bond determined?

The price of a bond is determined by using formulas that allow us to carry out the necessary
calculations to obtain said data. For this, certain elements must be available such as: Value of
the bond, coupon that the bond pays, numbers of years of maturity. , nominal value and the
required market return. That said, the price of the bond is determined by the present value of
the coupons it pays plus the present value of the face value. Which, once the calculations have
been made, its price can be, below par when the interest paid by the coupon is less than the
required rate, above par when the interest rate is greater than the discount rate and at par
when The interest is equal to the discount rate.
4) Explain the price and yield relationship of a bond.

The price and yield of a bond are directly related since the yield required in the market basically
determines its price, given that the behavior of the yield and the price of the bonds are handled
in the opposite direction, with the yield being more influential. since this is governed by
investors and the market, that said, if the rate of return will increase, the price of the bond
would decrease and vice versa.
5) What are the differences between common and preferred shares?
2
The difference between common and preferred shares is that preferred shares, as their name
determines, tend to have a certain preference when distributing dividends, thus reducing risks
since in the event that the company faces a crisis or its profits are adjusted Priority will be given
to these shareholders, however, by possessing these privileges, they also lose or are not
awarded the right to vote, which is why they cannot give their opinion or make important
decisions for the company, while common shareholders do have all power to make decisions
from within said entity, even so, these could also be said to lose privileges since in the event
that the company faces a scenario that harms the continuity of the company, and the time
comes to resolve all debts, the Common shareholders will be subject to receiving the surplus
from the capital distribution of preferred shareholders.
6) List common stock valuation models.

1. Zero growth model.
2. Constant growth model or Gordon-Shapiro model.
3. Variable growth model.
Activity 2. Multiple choice

Select the letter that corresponds to the correct answer.
3
1. Bonds with very low interest, have a high risk of loss are:
to. Subordinated bonds
b. Serial bonus
c. Temporary bonuses
d. Junk bonds
and. Corporate bonds
2. The two types of earnings that bonuses offer are:

to. Bond premium and coupons
b. Bonus discount and coupons
c. Par value of bond and coupons
d. Bonus premium and discount
and. Bond par value and premium
3. An advantage of common shares is:

to. The payment of dividends may be restricted by the clauses of the debenture contracts.
b. When using common capital to finance itself, the company necessarily has to issue additional
common shares
c. The possible loss of control of the company by the current owners
d. Dividend payments may be restricted
and. They can use stock sales to quickly obtain financing in the stock markets.
Activity 3. Case resolution

Solve the following practical cases.
4
1) A company that wants to determine the price of 5 bonds, each with a different maturity period
and all measured on the same date. The summarized data is as follows. (Describe if it is with
premium, at par or discount).
Bonuses Nominal value Coupon rate Expiration Performance

TO $ 5,000 12% 3 years 11%
b $ 10,000 10% 15 years 11%
c $ 2,000 8% 5 years 12%
d $ 2,500 9% 6 years 8%
AND $ 20,000 11% 20 years 10%
Bonus “A”
I = M × I Bo =
I = 5,000 × 0.12
I = 600 Bo = 5,122.28 (sold at a premium)
Bonus “B”
I = M × I Bo =
I = 10,000 × 0.10
I = 1,000 Bo = 9,280.91 (sold at a discount)
Bonus “C”
I = M × I Bo =
I = 2,000 × 0.08
I = 160 Bo = 1,711.61 (sold at a discount)
Bonus “D”
I = M × I Bo =
I = 2,500 × 0.09
5
I = 225 Bo = 2,615.57 (sold at a premium)
Bonus “E”
I = M × I Bo =
I = 20,000 × 0.11
I = 2,200 Bo = 21,702.71
2) Complex Systems has one bond issue outstanding with a face value of $1,000 and a coupon rate
of 12%. The issue pays annual interest and there are 16 years left until its maturity date.
DATA:
M = $1,000 I = M × I
tcup = 12% I = 1,000 × 0.12
n = 16 years I = 120
Kd ”a” = 10%
Kd “b” = 12%
Bo “a” = ?
Bo “b” = ?
to. If bonds of similar risk currently earn a 10% rate of return, how much should Complex Systems'
bond sell for today?
Bo =
Bo = 1,156.47 (must sell above par)
b. If the required return were 12% instead of 10%, what would be the present value of the Complex
Systems bond? Compare this result with your answer from part a) and analyze them.
Bo =
6
Bo = 1,000 (it would be sold at par, since the coupon rate is equal to the rate required by the market)
3) Midland Utilities has outstanding a bond issue with a face value of $1,000 and a maturity of 12
years. The bond has a coupon rate of 11% and pays annual interest.
DATA:
M = 1,000 I = M × I
n = 12 years I = 1,000 × 0.11
tcup = 11% I = 110
Kd “1” = 11%
Kd “2” = 15%
Kd “3” = 8%
Bo “1” = ?
Bo “2” = ?
Bo “3” = ?
to. Calculate the value of the bond if the required return is: 11%, 15% and 8% and make a graph with
these results.
Bo “1” =
Bo “1” = 1,000 (sold at par)
Bo “2” =
Bo “2” = 783.17 (would sell below par)
7
Bo “3” =
Bo “3” = 1,226.08 (sold above par)
4) Scotto Manufacturing is a mature company in the machine tool components industry. The most
recent dividend on the company's common stock was $2.40 per share. Due to both its maturity
and stable sales and earnings, the company's management believes that dividends will remain at
the current level for the foreseeable future.
8
DATA:
Po “1” = ? Po = D¹ / Ks
Po “2” = ?
D¹ = 2.40
Ks¹ = 12%
Ks² = 20%
a) If the required return is 12%, what will be the value of Scotto's common stock?
Po = 2.40 / 0.12
Po = 20
b) If the company's risk as perceived by market participants suddenly increased causing the required
return to increase to 20%, what would be the value of the common stock?
Po = 2.40 / 0.20
Po = 12
5) Kelsey Drums, Inc., is a well-established supplier of fine percussion instruments to orchestras

throughout the United States. The company's Class A common stock paid an annual dividend of
$5.00 per share for the past 15 years. Management expects to continue paying at the same rate
for the foreseeable future. Sally Talbot purchased 100 shares of Kelsey's Class A common stock
10 years ago when the required rate of return on the stock was 16%. She wants to sell her shares
today. The current required rate of return on stocks is 12%. What capital gain or loss will Sally
realize from her shares?
9
DATA:
D¹ = $5 Po = D¹/Ks
Number of shares = 100 gp “10 years ago” = 5 / 0.16
Ks¹ = 16% Po “10 years ago” = 31.25 × 100 shares = 3,125
Ks² = 12% Po “today” = 5 / 0.12
Po “today” = 41.60 × 100 shares = 4,160
(If Mrs. Sally Talbot decided to sell her shares today she would make a profit of $1,035)
6) McCracken Roofing, Inc. common stock paid a dividend of $1.20 per share last year. The company
expects its earnings and dividends to grow at a rate of 5% per year for the foreseeable future.
DATA:
D = $1.20 Ks = D¹/Po + g
g¹ = 5%
Q. Share = $28
Ks¹ = ?
g² = 10%
Ks² = ?
a) What required rate of return on these stocks would generate a per share price of $28?
D¹ = 1.20 (1 + g) Ks¹ = 1.26 / 28 + 5%
D¹ = 1.26 Ks¹ = 9.5%
b) If McCracken expects its earnings and dividends to grow at an annual rate of 10%, what required
rate of return would generate a share price of $28?
D¹ = 1.20 (1 + 10%) Ks² = 1.32 / 28 + 10%
D¹ = 1.32 Ks² = 14.71%
10
7) Elk County Telephone paid the dividends presented in the table below over the past 6 years.
Año Dividendos
2017 $ 5.35
2016 $ 5.05 a) If you can earn 13% on investments of similar risk, what is the most
2015 $ 4.76 you would be willing to pay per share?
2014 $ 4.49
2013 $ 4.24 b) If you can earn only 10% on investments of similar risk, what is the
2012 $ 4.00 most you would be willing to pay per share?
Step 1. Step 2. Step 3.

g = (VF / VP)¹/n -1 D²⁰¹⁸ = D²⁰¹⁷ × (1 + g) Po = D¹ / Ks - g
g = (5.35 / 4.00)¹/⁵ -1 D²⁰¹⁸ = 5.35 × (1 + 0.059) a) Po = 5.66 / 0.13 - 0.059
g = 0.059 … 5.9% D²⁰¹⁸ = 5.66 Po = 79.71
b) Po = 5.66 / 0.10 - 0.059

Po = 138.04
8) Lawrence Industries' most recent annual dividend was $1.80 per share (D0=$1.80), and the
company's required return is 11%. Calculate the market value of Lawrence's stock when:
Year Dividends Growth rate

2020 1.80
2021 1.94 8%
2022 2.09 8%
2023 2.26 8%
2024 5%
Step 1. Step 2. Step 3.

D²⁰²¹ = D²⁰²⁰ × (1 + 0.08)¹ D⁰ desc = D¹ × (1 + Ks)^-n add the VFs of the
D²⁰²¹ = 1.80 × (1 + 0.08)¹ = 1.94 D⁰ desc = D²⁰²¹ × (1 + 0.11)^-1 dividends:
11
D²⁰²² = D²⁰²¹ × (1 + 0.08)¹ D⁰ desc = 1.94 × (1 + 0.11)^-1 VP = (1.74 + 1.69 + 1.65)
D²⁰²² = D²⁰²¹ × (1 + 0.08)¹ = 2.09 D⁰ dec = 1.74 VP = 5.08
D²⁰²³ = D²⁰²² × (1 + 0.08) D⁰ desc = D²⁰²² × (1 + 0.11)^-2
D²⁰²³ = D²⁰²² × (1 + 0.08)¹ = 2.26 D⁰ dec = 2.09 × (1 + 0.11)^-2
D⁰ dec = 1.69
D⁰ desc = D²⁰²³ × (1 + 0.11)^-3
D⁰ dec = 2.26 × (1 + 0.11)^-3
D⁰ dec = 1.65
a) Dividends are expected to grow 8% annually for 3 years and from year 4 onwards the growth rate
will be a constant 5% annually.
Step 4. Step #5. Step #6. Step #7

D²⁰²⁴ = D²⁰²³ × (1 + 0.05) Pn = Dn +1 / Ks - g Po = Pn (1 + Ks)^-n (VP + Po desc)
D²⁰²⁴ = 2.26 × (1 + 0.05) Pn = 2.37 / 0.11 - 0.05 Po = 39.5 (1 + 0.11)^-3 (5.08 + 28.88)
D²⁰²⁴ = 2.37 Pn = 39.5 Po = 28.88 R = 33.96
b) Dividends are expected to grow 8% annually for 3 years and from year 4 onwards the growth rate

D²⁰²⁴ = 2.26 × (1 + 0.00) Pn = 2.26 / 0.11 - 0.00 Po = 20.54 (1 + 0.11)^-3 (5.08 + 15.01)
D²⁰²⁴ = 2.26 Pn = 20.54 Po = 15.01 R = 20.09
c) Dividends are expected to grow 8% annually for 3 years and, from year 4 onwards, the growth rate
12
D²⁰²⁴ = 2.26 × (1 + 0.10) Pn = 2.48 / 0.11 - 0.10 Po = 248 (1 + 0.11)^-3 (5.08 + 181.33)
D²⁰²⁴ = 2.48 Pn = 248 Po = 181.33 R = 186.41
13

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NATIONAL AUTONOMOUS UNIVERSITY OF NICARAGUA

GROUP 4531V, SABATINO

 FLORES URBINA LUISA AMANDA

MSC: ISOLIETH RIVAS

MANAGUA, SATURDAY, FEBRUARY 6, 2021

2) List the characteristics that distinguish a bond.

3) How is the price of a bond determined?

4) Explain the price and yield relationship of a bond.

5) What are the differences between common and preferred shares?

6) List common stock valuation models.

Activity 2. Multiple choice

2. The two types of earnings that bonuses offer are:

3. An advantage of common shares is:

Activity 3. Case resolution

Bonuses Nominal value Coupon rate Expiration Performance

Bo = 1,156.47 (must sell above par)

Bo “1” = 1,000 (sold at par)

Bo “2” = 783.17 (would sell below par)

Bo “3” = 1,226.08 (sold above par)

5) Kelsey Drums, Inc., is a well-established supplier of fine percussion instruments to orchestras

Step 1. Step 2. Step 3.

b) Po = 5.66 / 0.10 - 0.059

Year Dividends Growth rate

Step 1. Step 2. Step 3.

Step 4. Step #5. Step #6. Step #7

Step 4. Step #5. Step #6. Step #7

Step 4. Step #5. Step #6. Step #7

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