Fin630 Assignment No. 2 solution
Tuesday, January 04, 2011 Posted In Fin Edit This
“Investment Analysis & Portfolio Management” (Fin 630)
Assignment No.02 Marks: 20
In order to analyze the performance of ABC Company, following information has been
extracted from its financial statements.
1. You are required to calculate the following ratios:
• ROA (Return on assets)
• ROE (Return on Equity)
• EPS (Earning per share)
2. Calculate the value of bond A using 15% coupon with 20-year maturity, paying 40 semiannual payments of Rs. 75 each, assuming required rate of return of 10%
3. Calculate the value of bond B using 11% coupon with 10-year maturity, paying 40 quarterly payments of Rs. 27.5 each, assuming required rate of return of 16%
Important Tips
1. This Assignment can be best attempted from the knowledge acquired after
watching video lecture no. 1 to lecture no 28 and reading handouts as well as
recommended text book).
2. Video lectures can be downloaded for free from www.youtube.com/vu.
Particular Rs. (000)
Net profit after tax 500
Total assets 8000
Common stock
100,000@ Rs. 10
1000
Retained earning 90
Current liabilities 25
Account receivables 50
Cost of goods sold 1800
Long term debt
Bond A
300@ Rs.1000
300
Bond B
200@ Rs.1000
200
Schedule
Opening Date and Time January 03, 2011 At 12:01 A.M. (Mid-Night)
Due Date and Time January 06, 2011 At 11:59 P.M. (Mid-Night)
.....................................
Solution:
ROA = 0.0625 or 6.25%
ROE = 0.5 or 50%
EPS = Rs.5 /share
value of bond A= Rs. 787.05
value of bond B= Rs. 344.42
....................
ROA = Net income Margin x Turnover
Net income margin = Net Income / sale or COGS x 100
Turnover = Sale or COGS / Total Asset
and
ROE = ROA / Leverage
Leverage = Total Assets / Share Holder Equity
and
EPS = Profit available for share holder / Average common shares
outstanding
these are formula from which we extract Answers
...................
Assignment No.02 Marks: 20
In order to analyze the performance of ABC Company, following information has been
extracted from its financial statements.
1. You are required to calculate the following ratios:
• ROA (Return on assets)
• ROE (Return on Equity)
• EPS (Earning per share)
2. Calculate the value of bond A using 15% coupon with 20-year maturity, paying 40 semiannual payments of Rs. 75 each, assuming required rate of return of 10%
3. Calculate the value of bond B using 11% coupon with 10-year maturity, paying 40 quarterly payments of Rs. 27.5 each, assuming required rate of return of 16%
Important Tips
1. This Assignment can be best attempted from the knowledge acquired after
watching video lecture no. 1 to lecture no 28 and reading handouts as well as
recommended text book).
2. Video lectures can be downloaded for free from www.youtube.com/vu.
Particular Rs. (000)
Net profit after tax 500
Total assets 8000
Common stock
100,000@ Rs. 10
1000
Retained earning 90
Current liabilities 25
Account receivables 50
Cost of goods sold 1800
Long term debt
Bond A
300@ Rs.1000
300
Bond B
200@ Rs.1000
200
Schedule
Opening Date and Time January 03, 2011 At 12:01 A.M. (Mid-Night)
Due Date and Time January 06, 2011 At 11:59 P.M. (Mid-Night)
.....................................
Solution:
ROA = 0.0625 or 6.25%
ROE = 0.5 or 50%
EPS = Rs.5 /share
value of bond A= Rs. 787.05
value of bond B= Rs. 344.42
....................
ROA = Net income Margin x Turnover
Net income margin = Net Income / sale or COGS x 100
Turnover = Sale or COGS / Total Asset
and
ROE = ROA / Leverage
Leverage = Total Assets / Share Holder Equity
and
EPS = Profit available for share holder / Average common shares
outstanding
these are formula from which we extract Answers
...................
Bond Valuation:
The price of a bond should equal the present value of its expected cash flows. The coupons
and the principal repayment of $1,000 are known, and the present value, or price, can be
determined by discounting these future payments from the issuer at an appropriate required
yield, r, for the issue. To solve for the value of an option-free coupon bond.
n
P = Σ ct / (1 + r)t + FV / (1 + r) n
i = 1
Where;
P = the present Value or price of the bond today (time period 0)
c = the semiannual coupons or interest payments
FV = the face value (or par value) of the bond
n = the number of semiannual periods until the bond matures
r = the appropriate semiannual discount rate or market yield
The price of a bond should equal the present value of its expected cash flows. The coupons
and the principal repayment of $1,000 are known, and the present value, or price, can be
determined by discounting these future payments from the issuer at an appropriate required
yield, r, for the issue. To solve for the value of an option-free coupon bond.
n
P = Σ ct / (1 + r)t + FV / (1 + r) n
i = 1
Where;
P = the present Value or price of the bond today (time period 0)
c = the semiannual coupons or interest payments
FV = the face value (or par value) of the bond
n = the number of semiannual periods until the bond matures
r = the appropriate semiannual discount rate or market yield
.....................
ROE = 0.5 or 50%
EPS = Rs.5 /share
value of bond A= Rs. 787.05
value of bond B= Rs. 344.42
....................
ROA = Net income Margin x Turnover
Net income margin = Net Income / sale or COGS x 100
Turnover = Sale or COGS / Total Asset
and
ROE = ROA / Leverage
Leverage = Total Assets / Share Holder Equity
and
EPS = Profit available for share holder / Average common shares
outstanding
...........
ANSWER:
Part AROA = Net income Margin x Turnover
Net income margin = Net Income / sale or COGS x 100
= 500 / 1800 x 100 = 27.77
Turnover = Sale or COGS / Total Asset
= 1800 / 8000 = 0.225
RoA= 27.77 % x 0.225 = 6.24825 %
ROE = Net Income / Share Holder Equity
= 500/1000 * 100 = 50
EPS = Profit available for share holder / Average common shares outstanding = 500,000 / 100,000
EPS = 5
Part BVB = I (PVIFA kd, n) +M (PVIFA kd, n)
I = Annual Coupon Payment
Kd = Required Return
M = Par Value
VB = I (PVIFA kd, n) +M (PVIFA kd, n)
= 75 (PVIFA 5, 40) +1000 (PVIFA 5, 40)
= 75(17.1591) + 1000 (.1420)
= 1286.9325 + 142
Value of Bond (A) = 1431.932
Part 3VB = I (PVIFA kd, n) +M (PVIFA kd, n)
VB = I (PVIFA kd, n) +M (PVIFA kd, n)
= 27.5 (PVIFA 4, 40) +1000 (PVIFA 4, 40)
= 75(19.7928) + 1000 (.2083)
= 534.4056 + 208.3
Value of Bond (B) = 742.705
EPS = Rs.5 /share
value of bond A= Rs. 787.05
value of bond B= Rs. 344.42
....................
ROA = Net income Margin x Turnover
Net income margin = Net Income / sale or COGS x 100
Turnover = Sale or COGS / Total Asset
and
ROE = ROA / Leverage
Leverage = Total Assets / Share Holder Equity
and
EPS = Profit available for share holder / Average common shares
outstanding
...........
ANSWER:
Part AROA = Net income Margin x Turnover
Net income margin = Net Income / sale or COGS x 100
= 500 / 1800 x 100 = 27.77
Turnover = Sale or COGS / Total Asset
= 1800 / 8000 = 0.225
RoA= 27.77 % x 0.225 = 6.24825 %
ROE = Net Income / Share Holder Equity
= 500/1000 * 100 = 50
EPS = Profit available for share holder / Average common shares outstanding = 500,000 / 100,000
EPS = 5
Part BVB = I (PVIFA kd, n) +M (PVIFA kd, n)
I = Annual Coupon Payment
Kd = Required Return
M = Par Value
VB = I (PVIFA kd, n) +M (PVIFA kd, n)
= 75 (PVIFA 5, 40) +1000 (PVIFA 5, 40)
= 75(17.1591) + 1000 (.1420)
= 1286.9325 + 142
Value of Bond (A) = 1431.932
Part 3VB = I (PVIFA kd, n) +M (PVIFA kd, n)
VB = I (PVIFA kd, n) +M (PVIFA kd, n)
= 27.5 (PVIFA 4, 40) +1000 (PVIFA 4, 40)
= 75(19.7928) + 1000 (.2083)
= 534.4056 + 208.3
Value of Bond (B) = 742.705
