Chapter 4 - Bond and Stock Valuations

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Perpetual Bond

Solution:

Given: Annually
Coupon Rate , C = 8%
Interest Payment, I=MV x C 80
Kd = 10%
MV = 1000

Required:
Value of Perpetual Bond? Infinit life

V = I / Kd 800.00
Non-Zero Coupon-paying Bond

Solution:

Given: Annually
Coupon Rate , C = 8%
Interest Payment, I=MV x C 80
Kd = 10%
MV = 1000
n= 30

VB = 754.15 + 57.31
VB = 811.46

Use Financial Calculator from website:


https://exploringfinance.com/bond-price-calculator/
Non-Zero Coupon-paying Bond

Solution:

Given: Annually
Coupon Rate , C = 8%
Interest Payment, I=MV x C 80
Kd = 9%
MV = 1000
n= 10

VB = 513.41 + 422.41
VB = 935.82
Zero Coupon Bond

Solution:

Given: Annually
Coupon Rate , C = 0%
Interest Payment, I=MV x C 0
Kd = 10%
MV = 1000
n= 30

VB = 0.00 + 57.31
VB = 57.31

Use Financial Calculator from website:


https://exploringfinance.com/bond-price-calculator/
Semiannual Compounding

Solution:

Given: Annually Adjustment for semi annual


I=C*MV 80 40
Coupon Rate = 8%
Kd = 10% 5%
MV= 1,000 1,000
n= 15 30

Annually:
VB = 608.49 + 239.39
VB = 847.88

Adjusted: For Semi-Annually


VB = 614.90 + 231.38
VB = 846.28
Use Finacial Calculator from website:
https://exploringfinance.com/bond-price-calculator/
Semiannual Compounding

Solution:

Given: Annually Adjustment for semi annual


I=C*MV 60 30
Coupon Rate = 6% Po = 515.16
Kd = 13.0% 7% Tc = 40%
MV= 1,000 1,000
n= 30 60

Annually:
VB = 449.74 + 25.57
VB = 475.30

Adjusted: For Semi-Annually


VB = 450.99 + 22.86
VB = 473.85

Given: Annually Adjustment for semi annual


I=C*MV 60 30
Coupon Rate = 6%
Kd = 12.0% 6%
MV= 1,000 1,000
n= 30 60

Annually:
VB = 483.31 + 33.38
VB = 516.69

Adjusted: For Semi-Annually


VB = 484.84 + 30.31
VB = 515.16

Kd based on interpolation = 12.00%

AT Kd =Kd x (1-Tc) = 7.2%


Semiannual Compounding

Solution:

B)

Given: Annually Adjustment for semi annual


I=C*MV 120 60
Coupon Rate = 12%
Kd = 10% 5%
MV= 1,000 1,000
n= 25 50 t has reduced 5 years

Annually:
VB = 1,089.24 + 92.30
VB = 1,181.54

Adjusted: For Semi-Annually


VB = 1,095.36 + 87.20
VB = 1,182.56
Quarterly Coupon Rate: Value of Bond

Solution:

Given: Annually Adjustment for Quarterly


I= MV * C 120 30
Coupon Rate = 12%
Kd = 8% 2%
MV= 1,000 1,000
n= 10 40

Annually:
VB = 805.21 + 463.19
VB = 1,268.40

Adjusted: For Quarterly


VB = 820.66 + 452.89
VB = 1,273.55

Use Finacial Calculator from website:


https://exploringfinance.com/bond-price-calculator/
Preferred Stock

Solution:

Given:
Par Value or Face Value = 100
C Rate = 8%
Discount Rate (Kp) is = 10%

Required:
Value of preferred Stock ?

Solution:
Divp = C x MV 8.00

V= 80.0
Common Sotck-Constant Growth

Solution:

Given:
Dividend per Share (Do) is = 3.24
Dividend Growth Rate (g) is = 8%
Discount Rate (Ke) is = 15%

Required:
Value of Common Stock ?

Solution:

D1=Do x (1+g) 3.50

V= 50.0
Common Sotck- Zero Growth Model

Solution:

Given:
Dividend per Share (Do) is = 3.24
Dividend Growth Rate (g) is = 0%
Discount Rate (Ke) is = 15%

Required:
Value of Common Stock ?

Solution:

D1=Do x (1+g) 3.24

V= 21.6
Common Sotck- Growth Phases Model

Solution:
Given:
Dividend per Share (Do) is = 3.24
Dividend Growth Rate (g1) is = 16% for t1= 3
Dividend Growth Rate (g2) is = 8% for t2= 3
Discount Rate (Ke) is = 15%
T is the total number of years

Required:
Value of Common Stock ?

Solution:

D0 3.24
D1=Dox(1+g1) 3.76 V1= 3.27
D2=Do x(1+g1)^2 4.36 V2= 3.30
D3=Do x(1+g1)^3 5.06 V3= 3.33
D4=D3 x(1+g2)^1 5.46 for t>3 V4= 51.30 for n=3

V= 61.19
Determining Bond YTM

Solution:

Given:
Po is the current market price of the bond. 1,250
C is the annual coupon Rate 10%
YTM is the yield to maturity (expressed as a decimal). ?
MV is the face value of the bond. 1,000
n is the total number of periods (in years to maturity). 15
I=C*MV 100

Required:
What is YTM?

Solution:

YTM is to be calculated based on Trial and Error Method using different Kd=YTM values:

Trial # 1:- Kd= 8.0%

VB = Po= 855.95 + 315.24 = 1,171.19 Less than Po

Trial # 2:- Kd= 7.0%

VB = Po= 910.79 + 362.45 = 1,273.24 greater than Po

Therfore YTM is computed by interpolated

YTM = Kd = 7.23%
Determining Bond YTM

Solution:

Given:
Po is the current market price of the bond. 850
C is the annual coupon Rate 10%
YTM is the yield to maturity (expressed as a decimal). ?
MV is the face value of the bond. 1,000
n is the total number of periods (in years to maturity). 12
I=C*MV 100

Required:
What is YTM?

Solution:

YTM is to be calculated based on Trial and Error Method using different Kd=YTM values:

Trial # 1:- Kd= 13.0%

VB = Po= 591.76 + 230.71 = 822.47 Less than Po

Trial # 2:- Kd= 12.0%

VB = Po= 619.44 + 256.68 = 876.11 greater than Po

Therfore YTM is computed by interpolated

YTM = Kd = 12.49%
Determining Bond YTM

Solution:

Given:
Po is the current market price of the bond. 1,494.93
C is the annual coupon Rate 10%
YTM is the yield to maturity (expressed as a decimal). ?
MV is the face value of the bond. 1,000
n is the total number of periods (in years to maturity). 14
I=C*MV 100

Required:
What is YTM?

Solution:

YTM is to be calculated based on Trial and Error Method using different Kd=YTM values:

Trial # 1:- Kd= 5.0%

VB = Po= 989.86 + 505.07 = 1,494.93 Less than Po

Trial # 2:- Kd= 4.0%

VB = Po= 1056.31 + 577.48 = 1,633.79 greater than Po

Therfore YTM is computed by interpolated


YTM = Kd = 5.00%
Determining the Semiannual Coupon Bond YTM

Solution:

Given:
Po is the current market price of the bond. 950
C is the semi-annual coupon payment. 8%
YTM is the yield to maturity (expressed as a decimal). ?
MV is the face value of the bond. 1,000
n is the total number of periods (in years to maturity). 20
I=C*MV 80

Required:
What is YTM?

Solution:

YTM is to be calculated based on Trial and Error Method using different Kd= values:

Trial # 1:- Kd= 9.0%

VB = Po= 730.28 + 178.43 = 908.71 Less than Po

Trial # 2:- Kd= 8.0%

VB = Po= 785.45 + 214.55 = 1,000.00 greater than Po

Therfore YTM is computed by interpolated

Kd= 8.55%

Thus , for SemiannualCoupon, YTM is calculated as follow:


YTM= 8.73%
Determining the Semiannual Coupon Bond YTM

Solution:

Given:
Po is the current market price of the bond. 515.16
C is the semi-annual coupon payment. 6%
YTM is the yield to maturity (expressed as a decimal). ?
MV is the face value of the bond. 1,000
n is the total number of periods (in years to maturity). 30
I=C*MV 60

Required:
What is YTM?

Solution:

YTM is to be calculated based on Trial and Error Method using different Kd= values:

Trial # 1:- Kd= 13.0%

VB = Po= 449.74 + 25.57 = 475.30 Less than Po

Trial # 2:- Kd= 12.0%

VB = Po= 483.31 + 33.38 = 516.69 greater than Po

Therfore YTM is computed by interpolated

Kd= 12.04%

Thus , for SemiannualCoupon, YTM is calculated as follow:


YTM= 12.4%
Determining Bond YTM

Solution:

Given:
Po =is the current market price of the bond. 950
C = is the annual coupon Rate 6%
YTM = is the yield to maturity (expressed as a decimal). ?
MV = is the face value of the bond. 1,000
n =t, is the total number of periods (in years to maturity). 5
I=C*MV 60

Required:
What is YTM?

Solution:

YTM is to be calculated based on Trial and Error Method using different Kd=YTM values:

Trial # 1:- Kd= 8.0%

Po= 239.56 + 680.58 = 920.15 Less than Po

Trial # 2:- Kd= 7.0%

Po= 246.01 + 712.99 = 959.00 greater than Po

Therfore YTM is in between 7% and 8%. It can be interpolated

YTM = Kd = 7.23%
Determining Bond Yield To Call (YTC)

Solution:

Given:
Po is the current market price of the bond. 1,494.93
C is the annual coupon Rate 10%
YTC Yield to Call ?
MV is the face value of the bond. 1,000
Call Price 1,100
n is the total number of periods (in years to maturity). 10
N = Adjusted N = n-1 after One year in the given question 9
I=C*MV 100

Required:
What is YTC?

Solution:

YTC is to be calculated based on Trial and Error Method using different Kd=YTC values:

Trial # 1:- Kd= 5.0%

VB = Po= 710.78 + 709.07 = 1,419.85 Less than Po

Trial # 2:- Kd= 4.0%

VB = Po= 743.53 + 772.85 = 1,516.38 greater than Po

Therfore YTC is computed by interpolated


YTC = Kd = 4.22%
Preferred Stock Yield

Solution:

Given:
Po is the current market price of the bond. 100
(Divp) Annual Dividend per Share = 10
What is the yield on preferred stock? ?

Required:
What is the yield on preferred stock? Kp

Solution:
Divp = C x MV 10.00

Kp = 10.0%
Determining the Yield on Common Stock

Solution:

Given:
Po is the current market price of the bond. 30
(Divp) Annual Dividend per Share = 3
(g) expected growth rate = 5%
What is the yield on common stock? ?

Required:
What is the yield on common stock? Ks

Solution:

Ks= 15.0%
Compute Cost Preferred Stock

Solution:

Given:
Dividend (Dp) = 5
Net Price of Preferred Stock = Market Price - F = 42

Required:
The cost of preferred stock?

Solution:

Kp= 11.9%
Compute Cost of Common Equity

Solution:

Given:
Dividend per share (Do) = 3
Market Price per share (Po) = 60
Growth rate (g) = 10%

Required:
Compute the Cost of Common Equity?

Solution:

D1 = 3.3
Ks= 15.5%
—Cost of New Common Stock Equity

Solution:

Given:
Dividend per share (Do) = 6
Market Price per share (Po) = 75
Growth rate (g) = 0%
Floatation cost rate (F) = 5%

Required:
Compute the Cost of NEW Common Equity?

Solution:

D1 = 6
Po - F = 71.25
Kn= 8.42%
Weighted Average Cost of Capital
Gallagher Corporation estimates the following costs for each component in its capital structure:

Source of Capital Cost


Bonds kd = 10%
Preferred Stock kp = 11.9%
Common Stock
Retained Earnings ks = 15%
New Shares kn = 16.25%

Gallagher’s tax rate is 40%


Assume that Gallagher’s desired capital structure is 40% debt, 10% preferred and 50% common equity.
What is the Weighted Average Cost of Capital
(A) If using retained earnings to finance the common stock portion the capital structure
(B) If using a new equity issue to finance the common stock portion the capital structure

Solution:
Given:
kd​(cost of debt) = 10%
kp (cost of preferred stock) = 11.9%
kcs​(cost of retained earnings) = 15%
Kn for New share Equity 16.25%
Wd​(weight of debt) = 40%
Wp​ (weight of preferred stock) = 10%
Wcs​(weight of common equity) = 50%
Tc​(corporate tax rate) = 40%

Required:
Weighted Average Cost of Capital (WACC) ?

Solution:
To calculate the Weighted Average Cost of Capital (WACC), we use the formula:

(A) If using retained earnings to finance the common stock portion the capital structure

WACC = 2.40% + 1.19% + 7.50%

WACC = 11.09%

(B) If using a new equity issue to finance the common stock portion the capital structure

WACC = 2.40% + 1.19% + 8.13%


WACC = 11.72%
Weighted Average Cost of Capital

Solution:
Given:
kd​(cost of debt) = 9%
kp (cost of preferred stock) = 0.0%
kcs​(cost of retained earnings) = 13%
Kn for New share Equity 0.00%
Wd​(weight of debt) = 40%
Wp​ (weight of preferred stock) = 0%
Wcs​(weight of common equity) = 60%
Tc​(corporate tax rate) = 40%

Required:
Weighted Average Cost of Capital (WACC) ?

Solution:
To calculate the Weighted Average Cost of Capital (WACC), we use the formula:

WACC = 2.16% + 0.00% + 7.80%

WACC = 9.96%

Ks = {9.96%-(40%)*9%(1-0.4)} / 60% 13.0%


Weighted Average Cost of Capital

Solution:
Given:
kd​(cost of debt) = 7.35%
kp (cost of preferred stock) = 11.69%
kcs​(cost of common stock) = 14.43%
Kre Cost of retained earnings 14.44%

Wd​(weight of debt) = 11.43%


Wp​ (weight of preferred stock) = 2.86%
Wcs​(weight of common stock) = 34.29%
Wre​(weight of retained earnings) = 51.43%
Tc​(corporate tax rate) =

Required:
Weighted Average Cost of Capital (WACC) ?

Solution:
To calculate the Weighted Average Cost of Capital (WACC), we use the formula:

Weight
Cost of
Item Book value (based on WACC
Capital
BV)
Bond 20,000 0.1143 7.35% 0.00840
Preferred Stock 5,000 0.0286 11.69% 0.00334
Common 60,000 0.3429 14.43% 0.04947
RE 90,000 0.5143 14.44% 0.07426
Total 175,000 1.0000 13.55%

WACC = 0.84% + 0.33% + 4.95% 7.4%

WACC = 13.55%
Weighted Average Cost of Capital

Solution:
Given:
kd​(cost of debt) = 3.50%
kp (cost of preferred stock) = 8.00%
kcs​(cost of common stock) = 12.00%

Tc​(corporate tax rate) = 30.0%


Weightage
Wd​(weight of debt) = 2,000,000 30.77%
Wp​ (weight of preferred stock) = 500,000 7.69%
Wcs​(weight of common equity) +(Weight retained) = 4,000,000 61.54%

TOTAL = 6,500,000 100.00%

Required:
Weighted Average Cost of Capital (WACC) ?

Solution:
To calculate the Weighted Average Cost of Capital (WACC), we use the formula:

Weight
Cost of
Item Book value (based on WACC
Capital
BV)
Dept 2,000,000 0.3077 3.50% 0.01077
Preferred Stock 500,000 0.0769 8.00% 0.00615
Common + Retained 4,000,000 0.6154 12.00% 0.07385

Total 6,500,000 1.0000 9.08%

WACC = 1.08% + 0.62% + 7.38%

WACC = 9.08%
Weighted Average Cost of Capital

Solution:
Given:
kd​(cost of debt) = 4.50%
kp (cost of preferred stock) = 7.00%
kcs​(cost of common stock) = 14.00%
Kre Cost of retained earnings 0.00%
Tc​(corporate tax rate) = 25.0%
Weightage
Wd​(weight of debt) = 1,500,000 30.00%
Wp​ (weight of preferred stock) = 300,000 6.00%
Wcs​(weight of common equity) +(Weight retained) = 3,200,000 64.00%

TOTAL = 5,000,000 100.00%

Required:
Weighted Average Cost of Capital (WACC) ?

Solution:
To calculate the Weighted Average Cost of Capital (WACC), we use the formula:

Weight
Cost of
Item Book value (based on WACC
Capital
BV)
Dept 1,500,000 0.3000 4.50% 0.01350
Preferred Stock 300,000 0.0600 7.00% 0.00420
Common 3,200,000 0.6400 14.00% 0.08960

Total 5,000,000 1.0000 10.73%

WACC = 1.35% + 0.42% + 8.96%

WACC = 10.73%
Weighted Average Cost of Capital

Solution:
Given:
kd​(cost of debt) = 6.00%
kp (cost of preferred stock) = 8.00%
kcs​(cost of common stock) = 12.00%
Kre Cost of retained earnings 11.50%
Tc​(corporate tax rate) =
Weightage
Wd​(weight of debt) = 2,500,000 21.37%
Wp​ (weight of preferred stock) = 1,200,000 10.26%
Wcs​(weight of common equity) = 5,000,000 42.74%
Wcs​(weight of retained earnings) = 3,000,000 25.64%
TOTAL = 11,700,000 100.00%

Required:
Weighted Average Cost of Capital (WACC) ?

Solution:
To calculate the Weighted Average Cost of Capital (WACC), we use the formula:

Weight
Cost of
Item Book value (based on WACC
Capital
BV)
Dept 2,500,000 0.2137 6.00% 0.01282
Preferred Stock 1,200,000 0.1026 8.00% 0.00821
Common 5,000,000 0.4274 12.00% 0.05128
Retained earnings 3,000,000 0.2564 11.50% 0.02949
Total 11,700,000 1.0000 10.18%

WACC = 1.28% + 0.82% + 5.13% 2.9%

WACC = 10.18%

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