MGT201 Assignment No 01 Spring 2019 Solution & Discussion
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An investor, Mr. Ahmed is planning to add shares and bonds in his investment portfolio for which two options are available in the market with the following information:
You are required to help Mr. Ahmed in valuation of both investment options by calculating:
Value of stock today (8 marks)
Intrinsic value of the bond (8 marks)
Compare stock and bond prices with their market prices and identify whether stock and bond is overvalued or undervalued? Justify your answer with proper calculation and reasoning (4 Marks).
NOTE: Formula and complete working is mandatory in each part, provide complete calculations
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i think on extended day
Where is solution of this file?
Value of Stock = Po = [D1/(1+R)] + [D2/(1 + R)^2] + [P2/(1 + R)^2]
Do = Rs. 4.8/share
D1 = Rs. 5/share
D2 = Rs. 5.5/share
P2 = Rs. 50/share
Value of stock = Po = [5/(1 + 0.12)] + [5.5/(1 + 0.12)^2] + [50/(1 + 0.12)^2]
Po = [5/1.12] + [5.5/1.2544] + [50/1.2544]
Po = 4.46 + 4.38 + 39.86
Po = Rs. 48.7/share
2) Intrinsic value of the bond
Bond Price = C × [1 – (1 + r)^-N / r] +[ P / (1 + r)^N]
Where C is a periodic coupon payment, r is the market interest rate or required rate of return, and P is the par value of a bond. N is no. of periods
Par Value = P = Rs. 1000
Coupon Rate = 10% s.a
Interest Rate = R = 12% p.a = 12%/2 = 6% s.a
Annual Coupon Payment = 1000 x 10% = 100
Semi Annual Coupon Payment = 100/2 = 50
Bond Price = 50 x [1 – (1 +0.06)^-10 / 0.06] + [ 1000/(1 + 0.06)^10]
Po = 50 x [(1 – 0.5584)/0.06] + [1000/(1.06)^10
Po = 50 x 0.4416/0.06 + 1000/1.7908
Po = 368 + 558.40
Po = 926.40
Stock price is undervalued as intrinsic price is Rs. 48.7 whereas market price is Rs. 45/share.
Bond price is undervalued as intrinsic price is Rs.926.4 whereas market price is Rs. 910/share.
MGT201 Assignment No 01 Solution Spring 2019