MGT411 Assignment No. 2 Solution

QUESTION #1:Marks 20)
Mr.Toseef,the Chief Financial Officer of a mutual fund Company,was given the task to ascertain the firm ’s bond and stock values.To perform the necessary analysis,Mr.Toseef gathered the following relevant data on the firm ’s bonds and stocks.BONDS:The firm has a Rs.1,000 par value bond with a 9 percent coupon interest rate outstanding. The bond has 12 years remaining to its maturity date.STOCKS:The firm ’s common stock currently pays an annual dividend of Rs.1.80 per share.The required return on the common stock is 12 percent.
 

REQUIRED:
Bonds:

A.If interest is paid annually ,what is the value of the bond when the required stated return is 10 percent
B.Using the 10 percent required return,find the bond ’s value when interest is paid semiannually Stock: 

Estimate the value of common stock under each of the following dividend-growth-rate assumptions: 

A.Dividends are expected to grow at a constant annual rate of 5 percent to infinity.
B.Dividends are expected to grow at an annual rate of 5 percent for each of the next 3 years followed by a constant annual growth rate of 4 percent in years 4 to infinity.

Solution:-

Question#1 Solution:

Bond Valuation
Part a)
Bond value = c [1 – 1/(1+r)^n] / r + Par/(1+r)^n
Bond value = 90 [1 – 1/(1+0.10)^12] / 0.10 + 1000/(1+0.10)^12
Bond Value = 90 [1 – 0.3186 /0.10] + 1000/3.1384
Bond value = 90 (6.814) + 318.63
Bond value = 613.26 +318.63
Bond Value = 931


Part b)
Bond value = c [1 – 1/(1+r)^n ]/ r + Par/(1+r)^n
Bond value = 45 [1 – 1/(1+0.05)^24 / 0.05 + 1000/(1+0.05)^24
Bond Value = 45 [1 – 0.3100 /0.05] + 1000/3.2250
Bond value = 45 (13.8) + 310.07
Bond value = 621 +310.
Bond Value = 931


Part a)
P = Div(1+g)/rF +rP – g

D = 1.80
Rce = rF +rP = 12%
g = 5%

P = 1.80 (1+0.05) / 12% - 5%
P = 1.80 (1.05) / 7%
P = 1.89/0.07
P = 27

Part b)
Div1= Do(1+g)3
Div1= 1.80 (1+0.05)3
Div1= 1.80 (1.1576)
Div1 = 2.083

P0 = D0 x (1 + g)/(R – g)
P0= 2.083 x 1.04/(0.12 – 0.04)
P0= 2.166 / 0.08
P0= 27.075

QUESTION #2 Marks 10)
A commercial bank has following data:
Total assets valued Rs.1,000,000
Item Assets Liabilities
Interest rate sensitive 30%40%
Interest rate non-sensitive 70%60%
Initial interest rate 10%7%
Interest rate increase 2%both in assets and liabilityRequired
What will be the net interest profit increase /decrease due to the interest rate change your answer should be in absolute amount.

Solution:-

Assets
Liabilities
Interest rate sensitive
300000
400000
Not interest rate sensitive
700000
600000
Initial interest rate
10%
7%
New increased interest rate on interest rate sensitive assets & liabilities
12%
9%
Revenue from Assets
Revenue from Liabilities
At initial interest rate
(0.10×300000)+(0.10×700000)
=100000
(0.07×400000)+(0.07×600000)
=70000
After an increase in interest rate
(0.12×300000)+(0.10×700000)
=106000
(0.09×400000)+(0.07×600000)
=78000
Profits at an initial interest rate:
Profit = (100000) – (70000) = 30000
Profits after an increase in interest rate:
Profit = (106000) – (78000)=28000
Gap Analysis Gap between interest rate sensitive assets and interest rate sensitive liabilities = (Interest rate sensitive assets of 300000) – (Interest rate sensitive liabilities Of 400000) =(Gap of - 100000)

Please do make changes in these assignment otherwise every one who copy this assignment as it is will awarded zero marks