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Fin621 Financial Statement Analysis Assignment No. 1 solution

Monday, November 14, 2011 Posted In Fin Edit This

SEMESTER FALL 2011

Financial Statement Analysis (FIN621)

Assignment No. 1

Due Date: 15 November, 2011 Marks: 15

Question # 1:

"Hamza Environmental solutions" is a sole-proprietorship business that was started few years ago. Mr. Hamza and his son are currently running the business.

Account Balances on 31st December, 2010 are given below:

Particulars Rs.

Cash 85,500

Notes Receivable 25,480

Accounts Receivable 130,180

Supplies 10,600

Land 392,000

Building 252,000

Accumulated Depreciation: Building 67,200

Office equipment 67,200

Accumulated Depreciation: office equipment 26,880

Notes Payable 224,000

Accounts Payable 45,360

Capital: December 31st, 2009 460,600

Drawings 140,000

Consulting fee earned 974,400

Advertising Expense 63000

Insurance Expense 77,440

Utilities Expense 30,080

Salaries Expense 490,560

Supplies Expense 19,280

Depreciation: Building 8,400

Depreciation: Office Equipment 6,720

You are required to:

Q1. Prepare the Balance Sheet as on 31st December 2010 assuming that the net income earned during the year was Rs. 278,920. (10 Marks)

Q2. Calculate the estimated useful life of the building assuming straight line depreciation method with no salvage value. Also, determine the period for which the building has been used for business operations. (5 Marks)

SOLUTION:

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Fin621 Assignment No. 1 Solution

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Fin622 Assignment No. 1 Fall 2011 solution

Saturday, October 29, 2011 Posted In Fin Edit This

ABC corporation stock is selling for Rs. 150 per share according to Karachi stock exchange market summary. A rumor about the company has been heard that the firm will make an exciting new product announcement next week. By studying the industry, it is being concluded that this new product will support a growth rate of 20% in dividend for two years. After that it is expected that the growth rate in dividend will decline to 6% and remains same onwards. The firm currently pays an annual dividend of Rs. 4.

The rate of return on stocks like ABC corporation is 10%.

Required:

I. Find out the values for D1, D2 and D3 (8 Marks)

II. What will be the price of stock (P2) at the end of year 2? (4 Marks)

III. What will be the present value (P0) of stock? (6 Marks)

IV. Should we buy stocks of ABC Corporation at Rs. 150? (2 Marks)

Solution

Find out the values for D1, D2 and D3

D1= 4 (1+0.2) =4.8

D2= 4.8 (1+0.2) =5.76

D3=5.76 (1+0.05) =6.11

What will be the price of stock (P2) at the end of year 2?

P2= 5.76 (1+0.2)/ .1-0.05

P2=138.24

What will be the present value (P0) of stock?

PO= 4.8/(1+.1)1 + 5.76/(1+.1)2 + 6.11/(1+.1)3 + 128.31/(1.1)3

= 110

Should we buy stocks of ABC Corporation at Rs. 150

As the present value of the stock is less then the current selling price so the stock should not be purchased.

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Q1. Keeping other factors constant, you are required to highlight the reasons for the increase in current ratio.

As per my suggestions if all other factors are kept constant than the reasons for increase in currents ratios are as followings

Solution:
1-Sweeping of Bank Accounts by company
2-Improved Current Asset by Rising Shareholder’s Funds
3-Sell-off Unproductive Assets by company
4-Pay off Current Liabilities
5-Faster Conversion Cycle of Debtors or Accounts Receivables
6-Increase in company cash balance with a long-term loan
7-Increase in current assets with new equity investments
8-Convertion fixed assets to cash by company
9-Pay off of some current liabilities

Q2. You are also required to suggest that, with company’s point of view, would this increase be considered as positive or negative. Give arguments in favor of your suggestion.

Solution :
The ideal current ration is supposed to be 2:1 means that current assests must be twice that that of current liabilities. If this ratio is less than 2:1 the short term financial position is not supposed to be too favourable but if its is more than this limit than it is showing idleless no working capital.

Here in this scenario
current ratio in 2009 is 1.2:1
current ratio in 2010 is 1.96:1
conclusion

Although increase in current ratio is positive sign but ratios in both years don’t match the standard requirements

Fin622 Solved current Online Quiz

Thursday, October 27, 2011 Posted In Fin Edit This

Question # 1 of 10 ( Start time: 10:00:21 PM ) Total Marks: 1

Since preferred stock dividends are fixed, valuing preferred stock is roughly equivalent to valuing:

Select correct option:

A zero growth common stock. (CORRECT)

A positive growth common stock

A short-term bond

An option.

If you deposit $12,000 per year for 16 years (each deposit is made at the beginning of each year) in an account that pays an annual interest rate of 15%,

what will your account be worth at the end of 16 years?

Select correct option:

$82,168.44

$71,450.82

$768,901.12 (CORRECT)

$668,609.67

Question # 3 of 10 ( Start time: 10:02:17 PM ) Total Marks: 1

The present value of Rs.5,000 received at the end of 5 years, discounted at 10 percent, is closest to:

Select correct option:

Rs.3,105. (CORRECT)

Rs.823.

Rs.620.

Rs.3,403.

Question # 4 of 10 ( Start time: 10:02:50 PM ) Total Marks: 1

Which of the following stock would provide a regular income to the investors?

Select correct option:

Growth stock

Income stock (CORRECT)

Aggressive stock

Defensive stock

Question # 5 of 10 ( Start time: 10:03:33 PM ) Total Marks: 1

You have calculated that the required rate of return on a particular common stock is less than the expected rate of return. Therefore, you would conclude:

Select correct option:

That the stock is more risky than the market portfolio. (CORRECT)

That an investor should buy the stock.

That the stock has a high dividend payout ratio.

That an investor should sell the stock.

Question # 6 of 10 ( Start time: 10:04:28 PM ) Total Marks: 1

If an investor buys a non-zero coupon bond and holds it to maturity, then the rate of return she will receive depends on:

Select correct option:

The bond's maturity value.

The price paid for the bond

The interest payments to be received.

All of the given options (CORRECT)

Question # 7 of 10 ( Start time: 10:05:31 PM ) Total Marks: 1

Which of the following is a long-term source of financing for a firm?

Select correct option:

Corporate Bonds (CORRECT)

Money Market instruments

Trade credit

Accounts Payables

Question # 8 of 10 ( Start time: 10:06:17 PM ) Total Marks: 1

Which of the following option is related to primary financial market?

Select correct option:

Selling old shares

Initial Public Offering (CORRECT)

Buying Mutual Funds Certificates

Buying Bonds issued in previous year

Question # 9 of 10 ( Start time: 10:07:20 PM ) Total Marks: 1

If a creditor wanted to know if a potential customer paid its bills on time, the creditor could look at the potential customer's:

Select correct option:

Current ratio.

Acid ratio.

Average age of accounts payable. (CORRECT)

Average age of accounts receivable

Which of the following technique of stock evaluation considers quantitative factors as well as qualitative factors for valuation?

Select correct option:

Technical Analysis

Fundamental Analysis (CORRECT)

Constant Growth Model

No Growth Model

Fin630 GSB No. 1 solution

Wednesday, October 26, 2011 Posted In Fin Edit This

1. This news will bring down the prices.

2. so existing shareholders will behave different, some will sell some will buy the shares.

3. the prices will increase on next day because the potential investors will start buying.

4. the lahore stock exchange and islamabad stock exchanges will behave in the same way. if the company is listed in these stock exchanges also. the reason is:

1 the capital market is sensitive for public information.

2 the behaviour of invertors is same for risk taking.

Fin611 GDB Solution

Tuesday, October 25, 2011 Posted In Fin Edit This

Miss. Nazia is the owner of a business entity with a capital of Rs. 10 Million. She has introduced her own brand of ladies fashion & bridal garments sold through boutiques in various cities. According to her understanding there are two systems of record keeping available; single entry system and double entry system. Keeping in view her business profile, you, being a chief accountant, are required to suggest a suitable accounting system for record keeping? You are also required to support your suggested system with valid arguments/reasons.

Solution:

Being a chief accountant I suggest a double entry system. Because Miss. Nazia are supplied her own brand of ladies fashion & bridal garments sold through boutiques in various cities. That are the large scale of the business. In large scale of business we adopted a double entry system.

FIN625 GSB No. 1 solution Fall 2011

Tuesday, October 25, 2011 Posted In Fin Edit This

FIN625 GSB solution:

In these two countries (as well as others) women are given a lower standard of education and are usually either at home or doing low paid work. So unless

they get their act together really soon there will be many vacancies for skilled workers which cannot be filled , the result will be a lower rate of increase of the GDP over the coming years compared to the rate it would rise if women were properly educated and had access to skilled work.

Another point that if female population increase, it will lead to more women of child bearing age that will result in more population increase and hence burdening the resources of a country.

may be the relation ship is that when population will grow, there may not be many employment opprtunities and thus lower GDP or other way around, when population increases, the gov. has to spent more of money on the welfare of the public and thus less money is available for investment etc.

one more point,

females usually in these countires assume theri traditional roles.so they often are stay at home individuals. so basically they contribute nothing to the GDP.

another thing, is the salary (dont know if this point is relavent) females usually do not tent to have high paid salaries so they have less to spend and less to contribute to the economy.

so its not all negative.

you can also give positive points well that growth in female population ratio will not have an entirely negative effect on GDP.

Fin623 GDB No. 1 solution Fall 2011

Tuesday, October 25, 2011 Posted In Fin Edit This

Total Marks 20

Starting Date Monday, October 24, 2011

Closing Date Wednesday, October 26, 2011

Status Open

“Tax System of Pakistan”

Question/Description
A recent research report has revealed that only (2 percent) people pay tax in Pakistan. Which measures should be taken by the legislative bodies and CBR to improve the tax revenue of Pakistan?

Solution:

A recent research report has revealed that only (2 percent) people pay tax in Pakistan. Which measures should be taken by the legislative bodies and CBR to improve the tax revenue of Pakistan?

Solution:
With the help of following measures Tax revenue can be increase:
--Relief for the taxpayers by providing concessions and rationalizing the excise tariffs, thereby creating a conducive and business-friendly environment for the taxpayers.

--Broadening of tax base by minimizing exemptions and bringing more services in the excise regime.

--Simplification of tax laws to make them easier for the taxpayers and compatible with international best practices.

-- Removal of irritants and impediments in fiscal laws and procedures.

--Reducing the cost of doing business by furthering the automation of business processes and minimizing taxpayer interface.

--Improving tax compliance through better relationship between taxpayers and tax officials as well as by introducing stronger penalties for deliberate and repeated offenses.

Fin621 Online Quiz No. 1 announced

Monday, October 24, 2011 Posted In Fin Edit This

On-Line Quiz (No.01) Announcement, Quiz will cover video lecture no. 01 to 09

Schedule

Opening Date and Time October 24, 2011 At 12:01 AM (Mid-Night)

Closing Date and Time October 26, 2011 At 11:59 PM (Mid-Night)

24 hours extra time is not available

VUsolutions recommend you that first of all you may download the VUsolutions GURU file of this subject and then open it and then start ur quiz, its helps u alot during quiz (search ur question and find the answer during quiz): VUsolutions GURU download

Dear Students!

Read the following instructions carefully before attempting the Quiz.

Instructions

 You can start attempting the quiz at any time but within given date(s) by clicking the quick link for Quiz on VU-LMS as it will become enabled within the mentioned dates. As soon as the time will be over, it will automatically be disabled and will not be available to attempt it.

 Quiz will be based on Multiple Choice Questions (MCQs). Covering video Lecture 1 to 09.

 Each question has a fixed time limit of 90 seconds. So you have to save your answer before 90 seconds. But due to unpredictable/unstable Internet speed, it is strongly recommended that you save your answer within 60 seconds to avoid any inconvenience. While attempting a question, keep an eye on the remaining time.

 Attempting quiz is unidirectional. Once you have moved forward to the next question, you will not be able to go back to the previous one. Therefore before moving to the next question, make sure that you have selected the best option and saved your answer.

 DO NOT press back button of your browser or refresh the page while attempting a question. Otherwise you will lose the chance of attempting the current question and a new question will be loaded.

 DO NOT try to disable “Java Script” in your browser; otherwise you will not be able to attempt the quiz.

 If for any reason, you lose access to Internet (like power failure or disconnection of Internet), you will be able to attempt the quiz again but from the next question where you left in last attempt. But remember that you have to complete the quiz before expiry of the deadline.

 If you failed to attempt the quiz in given time then no re-take or off line quiz will be held as compensation/replacement.

Fin621 Fin Statement Analysis GDB No. 1 solution

Saturday, October 22, 2011 Posted In Fin Edit This

Semester “FALL 2011”

“Financial Statement Analysis (FIN 621)”

This is to inform that Graded Discussion Board (GDB) has been opened according to the following schedule

Schedule

Opening Date

October 21, 2011

Closing Date and Time

October 26, 2011 At 11:59 P.M. (Mid-Night)

Note: No extra or bonus/grace period is available for attempting GBD.

Discussion Question

“Mr. Jahanzaib has set up a new sole proprietorship business one year ago. At the end of the financial year, he has to prepare financial statements of the business. In the last month of the closing year, he had an offer to sell the freehold land for Rs. 600,000/- which was previously purchased for Rs. 400,000/-. Mr. Jahanzaib had reported the land in his balance sheet at Rs. 600,000/- considering the offered value. Required:Do you think that Mr. Jahanzaib has rightly reported the land’s value in the Balance Sheet? Justify your answer in the light of accounting principle(s) discussed in the video lectures. You are only required to mention the name of applied principle(s).

Details are not required.” Note: Your comments should not be more than 40 words.

Instructions:

Read the following instructions before giving your comments on GDB:

Use the font style “Times New Roman” and font size “12”.

Your answer should be relevant to the topic i.e. clear and concise.

Do not copy or exchange your answer with other students. Two identical / copied comments will be markedZero (0) and may damage your grade in the course.

Books, websites and other reading material may be consulted before posting your comments but copying or reproducing the text from books, websites and other reading materials is strictly prohibited. Such comments will be marked as Zero (0).

Obnoxious or ignoble answer should be strictly avoided.

SOLUTION:

Cost Principle
From an accountant's point of view, the term "cost" refers to the amount spent
(cash or the cash equivalent) when an item was originally obtained, whether that purchase happened last year or thirty years ago. For this reason, the amounts shown on financial statements are referred to as historical cost amounts.

Because of this accounting principle asset amounts are not adjusted upward for inflation. In fact, as a general rule, asset amounts are not adjusted to reflect any type of increase in value. Hence, an asset amount does not reflect the amount of money a company would receive if it were to sell the asset at today's market value. (An exception is certain investments in stocks and bonds that are actively traded on a stock exchange.) If you want to know the current value of a company's long-term assets, you will not get this information from a company's financial statements - you need to look elsewhere, perhaps to a third-party appraiser.

:::::::::::::::::::::::::::::::

Effect of Cost Principle and Monetary Unit Assumption:

The amounts reported in the asset accounts and on the balance sheet reflect actual costs recorded at the time of a transaction. For example, let's say a company acquires 40 acres of land in the year 1950 at a cost of $20,000. Then, in 1990, it pays $400,000 for an adjacent 40-acre parcel. The company's Land account will show a balance of $420,000 ($20,000 for the first parcel plus $400,000 for the second parcel.). This account balance of $420,000 will appear on today's balance sheet even though these parcels of land have appreciated to a current market value of $3,000,000.

There are two guidelines that oblige the accountant to report $420,000 on the balance sheet rather than the current market value of $3,000,000: (1) the cost principle directs the accountant to report the company's assets at their original historical cost, and (2) the monetary unit assumption directs the accountant to
presume the U.S. dollar is stable over time—it is not affected by inflation or deflation. In effect, the accountant is assuming that a 1950 dollar, a 1990 dollar, and a 2011 dollar all have the same purchasing power.
:::::::::::::::::::::::::::::::::::

Cost Principle
From an accountant's point of view, the term "cost" refers to the amount spent (cash or the cash equivalent) when an item was originally obtained, whether that purchase happened last year or thirty years ago. For this reason, the amounts shown on financial statements are referred to as historical cost amounts. Because of this accounting principle asset amounts are not adjusted upward for inflation. In fact, as a general rule, asset amounts are not adjusted to reflectany type of increase in value. Hence, an asset amount does not reflect the amount of money a company would receive if it were to sell the asset at today's market value. (An exception is certain investments in stocks and bonds that are actively traded on a stock exchange.) If you want to know the current value of a company's long-term assets, you will not get this information from a company's financial statements—you need to look elsewhere, perhaps to a third-party appraiser.

Fin621 GDB No. 3 solution

Monday, July 04, 2011 Posted In Fin Edit This

Semester “Spring 2011”“Financial Statement analysis(FIN621)”

This is to inform that next Graded Discussion Board (GDB)will be opened according to the following schedule

Schedule

Opening Date and Time June 30 , 2011 At 12:01 A.M. (Mid-Night)

Closing Date and Time July 04 , 2011 At 11:59 P.M. (Mid-Night)

Topic/Area for Discussion“

Profitability of a business”Note: The discussion question will be from the area/topic mentioned above. So start learning about the topic now.

SOLUTION:

Following are possible ways to increase the gross profit

->An increase in selling price without corresponding increase in costs
->A decrease in costs without corresponding reduction in selling price
->Opening stock in trade is valued at a figure lower than should have been
->Purchases are stated at a lower figure than it should have been because of omission of invoices for purchases
->Sales figures are inflated because goods sent on consignments may have been inadvertently included
->Closing stock is valued at a higher figure than it should have been.

:::::::::::::::::::::::::::

Following are possible ways to increase the gross profit

1. An increase in selling price without corresponding increase in costs
2. A decrease in costs without corresponding reduction in selling price
3. A decrease in direct costs
4. Increase in sales volume by reducing price, if it result in extra sales
5. Advertisement if it results in increased sales

Fin622 GDB No. 3 solution

Friday, July 01, 2011 Posted In Fin Edit This

Semester “Spring 2011”

“Corporate Finance (Fin622)”

This is to inform that Graded Discussion Board (GDB # 03)

will be opened according to the following schedule

Schedule

Opening Date and Time
June 30, 2011 At 12:00 A.M. (Mid-Night)

Closing Date and Time
July 04, 2011 At 11:59 P.M. (Mid-Night)
Topic/Area for Discussion

“ Mergers & Acquisitions ”

Note: The discussion question will be from the area/topic mentioned above. So start learning about the topic now.

Identify the type of merger in each of the following cases:
Case 1: (Conglomerate Merger)
Case 2: (Congeneric Merger)
Case 3: (Horizontal Merger)
Case 4: (Horizontal Merger)

......................

SOLUTION:

Case 1 = Conglomeration
Case 2 = Product-extension merger
Case 3 = Market-extension merger
Case 4 = Horizontal merger

Conglomeration - Two companies that have no common business areas.

Product-extension merger - Two companies selling different but related products in the same market.

Market-extension merger - Two companies that sell the same products in different markets.

Horizontal merger - Two companies that are in direct competition and share the same product lines and markets.

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Case 2 is VERTICAL MERGER
:::::::::::::::::::::::::::::::::::::::::::

1-Conglomeration
2-Vertical Merger
3-Market-extension Merger
4-Horizontal Merger

:::::::::::::::::::::::::

2nd Is Vertical Because this type of merger involves a customer and a company or a supplier and a company merging. Imagine a baseball bat company merging with a wood production company. This would be an example of the supplier merging with the producer and is the essence of vertical mergers.
::::::::::::::::::::::::::::::::

Case 1 = Conglomeration

Case 2 = Product-extension merger

Case 3 = Market-extension merger

Case 4 = Horizontal merger

Conglomeration - Two companies that have no common business areas.

Product-extension merger - Two companies selling different but related products in the same

Market-extension merger - Two companies that sell the same products in different markets.

Horizontal merger - Two companies that are in direct competition and share the same product lines and markets.
::::::::::::::::::::::::::::::::::::::::::::::::::::

Case 1 = Product-extension merger / Conglomeration

Case 2 = Vertical merger

Case 3 = Purchase Mergers

Case 4 = Horizontal merge

Fin611 GDB No. 3 - solution soon

Thursday, June 30, 2011 Posted In Fin Edit This

Semester “Spring 2011”

“Subject Name (FIN611)”
This is to inform that Graded Discussion Board (GDB)
Has been opened according to the following schedule

Schedule

Opening Date and Time
June 30 , 2011 At 12:01 A.M. (Mid-Night)

Closing Date and Time July 04 , 2011 At 11:59 P.M. (Mid-Night)

Note: No extra or bonus/grace period is available for attempting GBD.

Discussion Question

The extracts from the draft balance sheet of Holding Company Limited as on 31st December, 2010 are:

Fixed asset Rs. 2,000; Investment in Subsidiary Company Limited Rs. 1,000; Current assets Rs.800; Share capital Rs. 2,400; Reserves Rs. 1,200; and Current liabilities Rs. 200.

The balance sheet of Subsidiary Company Limited revealed some of the following item on the similar date:

Fixed asset Rs. 900; Current assets Rs.300; Share capital Rs. 600; Reserves Rs. 400; and Current liabilities Rs. 200

The Holding Company Limited has acquired 90% share of the Subsidiary Company Limited on 1st January, 2010 when Subsidiary company’s reserves were worth Rs. 240. Goodwill impaired with Rs. 66 during the year.

Required: Calculate the amount of Goodwill, Group reserves and Minority interest to be appeared in the consolidated balance sheet of the Holding Company Limited as on 31st December, 2010.

Instructions:
Read the following instructions before giving your comments on GDB:

1.Use the font style “Times New Roman” and font size “12”. 2.Your answer should be relevant to the topic i.e. clear and concise. 3.Do not copy or exchange your answer with other students. Two identical / copied comments will be marked Zero (0) and may damage your grade in the course.4.Books, websites and other reading material may be consulted before posting your comments but copying or reproducing the text from books, websites and other reading materials is strictly prohibited. Such comments will be marked as Zero (0). 5. Obnoxious or ignoble answer should be strictly avoided.

Fin630 Assignment No. 2 solution

Saturday, June 18, 2011 Posted In Fin Edit This

“Financial Analysis & Portfolio Management (Fin 630)”
Assignment No. 02 Total Marks: 20

Question #01Regional textile issued a 10-year Rs. 500 par value bond at 12% coupon rate (assuming semiannual interest payments). Required rate of return for such investment is 10%.Pesco textile issued a 15-year Rs. 500 par value bond at 16% coupon rate (assuming semiannual interest payments). Required rate of return for such investment is 12%.
You are required to calculate:
• Coupon payment in each case
• No. of coupon payments in each case
• Value of each bond

Question #02Suppose you have following stocks in your portfolio:
1. Stock A which was purchased 11 months ago for Rs. 750, currently selling for Rs. 790and has paid Rs.20 dividend.
2. Stock B which was purchased 5 months ago for Rs. 900, currently selling for Rs. 910 and has paid Rs.15 dividend.
You are required to calculate:1. Holding period return of stock A
2. Holding period return of stock B
3. Annual return for both stocks

Note:
Show complete working (formula and calculations) for each part of questions.

::::::::::::::::::::::::::::::::::::::::::::

Solution:

Question #01

Regional textile issued a 10-year Rs. 500 par value bond at 12% coupon rate

(assuming semiannual interest payments). Required rate of return for such

investment is 10%.

Pesco textile issued a 15-year Rs. 500 par value bond at 16% coupon rate

(assuming semiannual interest payments). Required rate of return for such

investment is 12%.

You are required to calculate:

• Coupon payment in each case

• No. of coupon payments in each case

• Value of each bond

Coupon payment in each case:

Because the coupon payments are semi-annual, divide the coupon rate in half.

The coupon rate is the percentage off the bond's par value. As a result,

each semi-annual

Case#01

500*(12%/2) = 500*0.06 = 30

Case#02

500*(16% / 2) = 500*0.08 = 40

No. of coupon payments in each case:

Because two coupon payments will be made each year for ten years, we will

have

Coupon payments for

Case#01 = 10*2 =20

Case#02 = 15*02 = 30

Value of each bond

Like the coupon rate, the required yield of 12% must be divided by two

because the number of periods used in the calculation has doubled. If we

12%, our bond price would be very low and inaccurate. Therefore, the required semiannual yield is 6% (0.12/2) for case#02 and 5% for case#01 left the required yield at

Case#01

=30*[1-{1/ (1+0.05) ^20}] / 0.05 + 500 / (1+0.05) ^20

=30* [1-{1/ (1.05) ^20} / 0.05 + 500/ (1.05) ^20

=562.3

Case#02

=40*[1-{1/ (1+0.06) ^30}] / 0.06 + 500 / (1+0.06) ^30

=40*[1-{1/ 5.74}] / 0.06 + 500 / 5.74

=40*13.76+ 87.05

=637.64

Question #02

Suppose you have following stocks in your portfolio:

1. Stock A which was purchased 11 months ago for Rs. 750, currently selling

for Rs. 790and has paid Rs.20 dividend.

2. Stock B which was purchased 5 months ago for Rs. 900, currently selling

for Rs. 910 and has paid Rs.15 dividend.

You are required to calculate:

1. Holding period return of stock A

2. Holding period return of stock B

3. Annual return for both stocks

Holding period return = Ending value – Beginning value + Income /

Beginning value

Stock A

Holding period return = 790 – 750 +20 / 750 = 0.08

Holding period of 11 months = 0.08 *12/11 = 8.72%

Stock B

Holding period return = 910 – 900+15 / 900 = 0.027

Holding period of 5 months = 0.027 *12/5 = 6.48%

Annualized Return Formula

APY = (principal + gain/principal) ^ (365/days) – 1

Stock A

APY = (750+ 40 / 750) ^ (12/11) – 1

=1.05^1.09 -1

=5.46%

Stock B

APY = (900+ 10/900) ^ (12/5) – 1

= 2.4%

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Solution

Answer 1:

Coupon payment in each case:

Bound A: 30

Bond B: 40

No. of coupon payments in each case:

Bound A: 20

Bond B: 30

Value of each bond

B0 =C/ (1+i/2) n*2 + Par/ (1+i) n*2

Bound A: 562

Bond B: 637

______________________________

Holding period return of stock A

If you purchase 1 shares of stock at Rs.750.00 per share, each paying a Rs.20.00 annual

dividend, and you sell your shares after 11 months for Rs.790.00 per share, then the

holding period return would be 8.49%.

Holding period return of stock B

If you purchase 1 shares of stock at Rs.900.00 per share, each paying a Rs.15.00 annual

dividend, and you sell your shares after 5 months for Rs.910.00 per share, then the

holding period return would be 2.89%

Annual return for both stocks

While using the equation of Geometric Mean the annual return of both stock can b

measured

Annual return of both stock 4.95%

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Question #01

Regional textile issued a 10-year Rs. 500 par value bond at 12% coupon rate (assuming

semiannual interest payments). Required rate of return for such investment is 10%.

Pesco textile issued a 15-year Rs. 500 par value bond at 16% coupon rate (assuming semiannual

interest payments). Required rate of return for such investment is 12%.

You are required to calculate:

• Coupon payment in each case

• No. of coupon payments in each case

• Value of each bond

Coupon payment in each case:

Because the coupon payments are semi-annual, divide the coupon rate in half. The

coupon rate is the percentage off the bond's par value. As a result, each semi-annual

Case#01

500*(12%/2) = 500*0.06 = 30

Case#02

500*(16% / 2) = 500*0.08 = 40

No. of coupon payments in each case:

Because two coupon payments will be made each year for ten years, we will have

Coupon payments for

Case#01 = 10*2 =20

Case#02 = 15*02 = 30

Value of each bond

Like the coupon rate, the required yield of 12% must be divided by two because the

number of periods used in the calculation has doubled. If we left the required yield at

12%, our bond price would be very low and inaccurate. Therefore, the required semiannual

yield is 6% (0.12/2) for case#02 and 5% for case#01

Case#01

=30*[1-{1/ (1+0.05) ^20}] / 0.05 + 500 / (1+0.05) ^20

=30* [1-{1/(1.05)^20} / 0.05 + 500/(1.05)^20

=562.3

Case#02

=40*[1-{1/ (1+0.06) ^30}] / 0.06 + 500 / (1+0.06) ^30

=40*[1-{1/ 5.74}] / 0.06 + 500 / 5.74

=40*13.76+ 87.05

=637.64

Question #02

Suppose you have following stocks in your portfolio:

1. Stock A which was purchased 11 months ago for Rs. 750, currently selling for Rs. 790and has

paid Rs.20 dividend.

2. Stock B which was purchased 5 months ago for Rs. 900, currently selling for Rs. 910 and has

paid Rs.15 dividend.

You are required to calculate:

1. Holding period return of stock A

2. Holding period return of stock B

3. Annual return for both stocks

Holding period return = Ending value – Beginning value + Income / Beginning value

Stock A

Holding period return = 790 – 750 +20 / 750 = 0.08

Holding period of 11 months = 0.08 *12/11 = 8.72%

Stock B

Holding period return = 910 – 900+15 / 900 = 0.027

Holding period of 5 months = 0.027 *12/5 = 6.48%

I think (not sure)

Annualized Return Formula

APY = (principal + gain/principal) ^ (365/days) – 1

Stock A

APY = (750+ 90/750) ^ (12/11) – 1

=1.12^1.09 -1 =13%

Stock B

APY = (900+ 10/900) ^ (12/5) – 1

=2.4%
:::::::::::::::::::::::::::::::::::::::::::::::::::::::::::

“Financial Analysis & Portfolio Management (Fin 630)”

Assignment No. 02 Total Marks: 20

Question #01

Regional textile issued a 10-year Rs. 500 par value bond at 12% coupon rate (assuming semiannual interest payments). Required rate of return for such investment is 10%.

Pesco textile issued a 15-year Rs. 500 par value bond at 16% coupon rate (assuming semiannual interest payments). Required rate of return for such investment is 12%.

You are required to calculate:

• Coupon payment in each case

• No. of coupon payments in each case

• Value of each bond

Coupon payment in each case:

Because the coupon payments are semi-annual, divide the coupon rate in half. The coupon rate is the percentage off the bond's par value. As a result, each semi-annual

Case#01

500*(12%/2) = 500*0.06 = 30

Case#02

500*(16% / 2) = 500*0.08 = 40

No. of coupon payments in each case:

Because two coupon payments will be made each year for ten years, we will have

Coupon payments for

Case#01 = 10*2 =20

Case#02 = 15*02 = 30

Value of each bond

Like the coupon rate, the required yield of 12% must be divided by two because the number of periods used in the calculation has doubled. If we left the required yield at

12%, our bond price would be very low and inaccurate. Therefore, the required semiannual yield is 6% (0.12/2) for case#02 and 5% for case#01

Case#01

=30*[1-{1/ (1+0.05) ^20}] / 0.05 + 500 / (1+0.05) ^20

=30* [1-{1/ (1.05) ^20} / 0.05 + 500/ (1.05) ^20

=562.3

Case#02

=40*[1-{1/ (1+0.06) ^30}] / 0.06 + 500 / (1+0.06) ^30

=40*[1-{1/ 5.74}] / 0.06 + 500 / 5.74

=40*13.76+ 87.05

=637.64

Question #02

Suppose you have following stocks in your portfolio:

1. Stock A which was purchased 11 months ago for Rs. 750, currently selling for Rs. 790and has paid Rs.20 dividend.

2. Stock B which was purchased 5 months ago for Rs. 900, currently selling for Rs. 910 and has paid Rs.15 dividend.

You are required to calculate:

1. Holding period return of stock A

2. Holding period return of stock B

3. Annual return for both stocks

Stock holding period return:
stock A = (790-750+20)/750
= 60/750 = 0.08 = 8%
stock B = (910-900+15)/900
= 25/900 = 0.0277 = 2.78%

Annual holding return:
stock A = 12/11*0.08 = 0.087 = 8.7%
stock B = 12/5*0.0277 = .06648 = 6.67%

just check this net example:
1- The Holding Period Return is calculated as follows:[Income + (ending value - beginning value)]/beginning value Let’s look at an example. A stock that you have been holding in your portfolio for six months has paid dividends of $47 and is currently worth $693. You purchased the stock six months ago for $550. The Holding Period Return would be: [$47 + ($693 - $550)]/$550 or 34.5%you have had a 34.5% return on your investment over the length of time you have held it.

2-To annualize your Holding Period Return using simple interest, multiply your Holding Period Return by 12 divided by the number of months you have held the investment. For example, in our first stock example, the annualized return would be 34.5% X 12/6 or 69%. In the second bond example, the annualized return would be 1.6% X 12/1 or 19.2%.

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