Investment Analysis: Security Valuation

I.

Bond valuation:
1. Annual coupon payment:
A Tk. 100,000 par value bond pays the holder a coupon interest rate of 10% p.a payable annually. The bond will
be redeemed at par in 10 years. An investor wants to purchase the bond on the bond market to yield a return of
12% p.a. What would be the purchase price of the bond?
Year
Interest
Redemption

10

10,000
-

10,000
-

10,000
-

10,000
-

10,000
-

10,000
-

10,000
-

10,000
-

10,000
-

10,000
100,000

2. Semi-annual coupon payment:

A Tk. 100,000 par value bond pays the holder an interest rate of 10% p.a payable semi-annually. The bond will be
redeemed at par in 10 years. An investor wants to purchase the bond on the bond market to yield a return of 12%
p.a. payable semi-annually. What would be the purchase price of the bond?

II. Return on Equity (ke) calculation based on CAPM:

3. If kRF = 5%, kM = 12%, and Beta () = 1, what is the required rate of return on the firms stock?

III. Stock valuation (assume k = 12% p.a in all examples):

4. Zero growth: Calculate the current price (P0) of the Share.
Dividend (D)
Year

200

200

200

200

200

..........

200

..........

5. Zero growth after two years: Calculate the current price (P 0) of the Share.
Dividend (D)

200

200

200

.........

200

Year

.........

6. With constant growth: Calculate the current price (P 0) of the Share.

Dividend (D)
Year

100

105

110.25

115.76

...........

...........

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

...........

...........

7. Negative growth: Calculate the current price (P0) of the Share.

Dividend (D)
Year

100

93

86.49

80.44

...........

...........

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

...........

...........

8. Supernormal growth:
XYZ Ltd. recently paid a dividend, D0 = Tk. 20. The company expects to have super normal growth(g) of 20
percent for next 2 years before the dividend is expected to grow at a constant rate of 5 percent forever. The firms
required rate of return (ke) is 12 percent. Calculate,
i.
The dividend that will be payable in the end of year 5 (i,e D 5).
ii.
The value of the share at the end of year 2 (i,e P 2) .
iii.
The current fair market value (P0) of the share?

9. Current price, future price and investment yields of a share:

Given, D0 = 10, g = 6% and ke = 12% p,a. Please calculate the following:
i.
Current market price of the share (P0)
ii.
Price at the end of year 1 (P1)
iii.
What is the expected dividend yield, capital gains yield, and total return during the first year?

10. Internal Rate of Return (IRR) Calculation:

At present the shares of XYZ are selling at Tk. 200 per share. It is expected that XYZ will pay dividend of Tk. 10
per share in next five years. It is also expected that the market price of the share will be Tk. 400 per share after
five years from now. The cash flows of XYZ are summarized in the following table:
Description

Now

Share Price

200

Dividend (D)

Year 1

Year 2

Year 3

Year 4

Year 5
400

10

10

10

10

10

Base on above information,

Calculate NPV of the Investment based on ke = 12% p,a. Now comment on whether the share is overpriced or
underpriced?
Calculate the IRR of the investment.
Useful formulas:
1. PVn = FV (1+ k)n
2. PVAn= PMT x [1- 1/ (1+k)n] k
3. P0 = D1 (k - g)
4. NPV = PV of Future Cash flows Initial Investment

5.
6.

CAPM: ke = kRF + (kM kRF)

Total return % = (Capital gain + Dividend) / Initial Investment

7.

IRR = kb+ (ka-kb)[NPVb / (NPVb-NPVa)] where, ka = discount rate

above IRR, kb = discount rate below IRR, NPV a = NPV using ka and
NPVb = NPV using kb.