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FINANCIAL MANAGEMENT (MGT201)
DUE DATE: JULY 11, 2014 MARKS: 10 Learning Objective
To understand the concept and estimation of bond valuation.
To recognize the evaluation and application of stock betas & risk, SML and return
After attempting this assignment, the students would be able to determine:
Intrinsic value of a bond listed at any stock exchange working in Pakistan.
Stock betas, measure risk and draw SML using market data of KSE.
Assume that recently, you have been appointed as assistant to the financial analyst of the company named: XYZ and management of the company is now expected you to do some required calculations in the need to make few important financial decisions. Company formerly issued few common stocks and bond with which the related information is as given below:
A 10 years bond of par value Rs.8,000/- was issued, with annual coupon interest rate of 11.5%. Required rate of return on such bonds is 9% p.a.
Stock A was issued by the company, for which they have paid Rs.1.25 per stock as annual dividend, this year. Company’s earnings and divided is expected to grow at 6.5% in a year ahead.
Stock B was issued by the company, for which the required rate of return is 17%; beta is 1.5 while the market return is 15.5%.
Stock C was issued by the company, for which the risk free rate of return is 11.5%; market risk premium is 2.3% and required rate of return is 16.2%.
1. Keeping in view the given information, calculate the value of the bond.
2. Calculate and comment, how the value of the bond will be affected, if the required rate of return on bond is increased up to 13 %. [3 marks]
3. Using SML equation, you need to find out the risk free rate of return for stock B. Also interpret the result of stock B for investment purpose. [3 marks]
Note: Show formulas, complete calculation/ working along with decision comments to avoid any marks deduction.
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IMPORTANT INSTRUCTIONS/ SOLUTION GUIDELINES/ SPECIAL INSTRUCTIONS
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Use APA style for referencing and citation. For guidance search “APA reference style” in Google and read various websites containing information for better understanding or visit http://linguistics.byu.edu/faculty/henrichsenl/apa/APA01.html
RULES FOR MARKING
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to start krn na koi .......... mera finance to already bht week h
week nai hota weak hota hy sis
amir khan kch tu kaho kya howa stock c q diya hai aiwen jab us ka kch pocha hi nahi??
In Stock C you will see Risk Free Rate. It is required in SML equation.
hmm right it is risk free rate we need it yar how can i forget it ..good amir ..
Amir yar wese tum ne wo corporate finance main du pont identity wala mcq acha solve kia good..
ramazan ki waja se study ni hu rhe abe tk assginment ko me ne parha he nai he
kkoi he jo isko easy wrding me bta dye
SML Linear Equation for the Required Return of any Stock A:
rA = rRF + (rM - rRF ) β A .
yes stock b ka risk free rate isi formula ko mathematically adjust karke bane ga so adjust karen is formula ko to calculate risk free rate...