Comprehensive Business Finance Solutions: Bond Pricing and Valuation

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Added on  2023/06/15

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Homework Assignment
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This document provides solutions to a business finance assignment, covering various aspects of bond valuation and share price analysis. It includes calculations for bond prices at par, premium, and discount, considering factors like coupon rates, market rates, and years to maturity. Furthermore, it analyzes shareholder returns, expected dividends, and the impact of growth rates on share prices. Specific scenarios, such as the sale of bonds and revisions in growth rates, are also addressed with detailed numerical examples and explanations. Desklib offers more solved assignments and study tools for students.
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Running head: BUSINESS FINANCE
Business Finance
Name of the Student:
Name of the University:
Author’s Note:
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1BUSINESS FINANCE
Table of Contents
Answer to Question 1:................................................................................................................2
Requirement a:.......................................................................................................................2
Requirement b:.......................................................................................................................2
Requirement c:.......................................................................................................................3
Answer to Question 2:................................................................................................................3
Requirement a:.......................................................................................................................3
Requirement b:.......................................................................................................................4
Requirement c:.......................................................................................................................5
Answer to Question 3:................................................................................................................5
Answer to Question 4:................................................................................................................5
Requirement a:.......................................................................................................................5
Requirement b:.......................................................................................................................6
Answer to Question 5:................................................................................................................6
Answer to Question 6:................................................................................................................6
Bibliography:..............................................................................................................................7
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2BUSINESS FINANCE
Answer to Question 1:
Requirement a:
Particulars Amount
Face Value A $ 100
Coupon Rate B 12.75%
No. of Payments in a year C 2
Coupon Payments D=(AxB)/C $ 6.38
Years to Maturity E 5
Market Rate p.a. F 12.75%
Semi-Annual Market Rate G=F/2 6.38%
Total Nos. of Payments H=CxE 10
Price to Bond
I=Dx[1-
(1/(1+G)^H)]/G+[A/(1
+G)^H] $ 100
The bond is priced at par.
Requirement b:
Particulars Amount
Face Value A $ 1,000
Coupon Rate B 12.75%
No. of Payments in a year C 2
Coupon Payments D=(AxB)/C $ 63.75
Years to Maturity E 13
Market Rate p.a. F 11.00%
Semi-Annual Market Rate G=F/2 5.50%
Total Nos. of Payments H=CxE 26
Price to Bond
I=Dx[1-
(1/(1+G)^H)]/G+[A/(1
+G)^H] $ 1,120
The bond is priced at premium.
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3BUSINESS FINANCE
Requirement c:
Particulars Amount
Face Value A $ 10,000
Coupon Rate B 11.50%
No. of Payments in a year C 2
Coupon Payments D=(AxB)/C $ 575.00
Years to Maturity E 25
Market Rate p.a. F 13.25%
Semi-Annual Market Rate G=F/2 6.63%
Total Nos. of Payments H=CxE 50
Price to Bond
I=Dx[1-
(1/(1+G)^H)]/G+[A/(1
+G)^H] $ 8,733
The bond is priced at discount.
Answer to Question 2:
Requirement a:
Particulars Amount
Face Value A $ 3,500
Coupon Rate B 12.00%
No. of Payments in a year C 2
Coupon Payments D=(AxB)/C $ 210.00
Years to Maturity E 14
Market Rate p.a. F 7.00%
Semi-Annual Market Rate G=F/2 3.50%
Total Nos. of Payments H=CxE 28
Price to Bond
I=Dx[1-
(1/(1+G)^H)]/G+
[A/(1+G)^H] $ 5,045.86
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4BUSINESS FINANCE
Requirement b:
Value of Bond after 6 years:
Particulars Amount
Face Value A $ 3,500
Coupon Rate B 12.00%
No. of Payments in a year C 2
Coupon Payments D=(AxB)/C $ 210.00
Years to Maturity E 6
Market Rate p.a. F 7.00%
Semi-Annual Market Rate G=F/2 3.50%
Total Nos. of Payments H=CxE 12
Price to Bond
I=Dx[1-
(1/(1+G)^H)]/G+
[A/(1+G)^H] $ 4,346
Price to ZNZ Bank:
Particulars Amount
Face Value A $ 4,346
Coupon Rate B 12.00%
No. of Payments in a year C 2
Coupon Payments D=(AxB)/C $ 260.73
Years to Maturity E 8
Market Rate p.a. F 6.00%
Semi-Annual Market Rate G=F/2 3.00%
Total Nos. of Payments H=CxE 16
Selling Price to Bond
I=Dx[1-
(1/(1+G)^H)]/G+
[A/(1+G)^H] $ 5,983
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5BUSINESS FINANCE
Requirement c:
Partiulars Amount
Face Value A $ 3,500
Coupon Rate B 12.00%
No. of Payments in a year C 2
Coupon Payments D=(AxB)/C $ 210.00
Years to Maturity E 6
Total Coupon Payments F=CxDxE $ 2,520.00
Sale Price of Bond G $ 5,983
Profit on Sales H=G-A $ 2,483
Nominal Annual Yield I=((F+H)/A)/E 24%
Answer to Question 3:
Particulars Amount
Last Dividend paid per share A $ 1.34
Current Growth Rate B 6%
Expected Dividend per share C=Ax(1+B) $ 1.42
Return to Shareholders D 13.40%
Share Price E=C/D $ 10.60
Answer to Question 4:
Requirement a:
Particulars Amount
Current Growth Rate A 2%
Expected Dividend per share B $ 2.28
Return to Investors C 15.00%
Share Price
D=A/(C-
A) $ 17.54
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6BUSINESS FINANCE
Requirement b:
Particulars Amount
Revised Growth Rate A 8%
Dividend paid per share B $ 2.28
Expected Dividend per share C=Bx(1+A) $ 2.46
Return to Investors D 15.00%
Revised Share Price E=C/(D-A) $ 35.18
Current Share Price F $ 17.54
Increase in Share Price G=E-F $ 17.64
Answer to Question 5:
Particulars Amount
Face Value A $ 1,300
Coupon Rate B 5.00%
No. of Payments in a year C 2
Coupon Payments D=(AxB)/C $ 32.50
Years to Maturity E 13
Market Rate p.a. F 1.00%
Semi-Annual Market Rate G=F/2 0.50%
Total Nos. of Payments H=CxE 26
Price to Bond
I=Dx[1-
(1/(1+G)^H)]/G+[
A/(1+G)^H] $ 1,932.42
Answer to Question 6:
Particulars Amount
Revised Growth Rate A 3.80%
Dividend paid per share B $ 2.00
Expected Dividend per share C=Bx(1+A) $ 2.08
Return to Investors D 13.00%
Revised Share Price E=C/(D-A) $ 22.57
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7BUSINESS FINANCE
Bibliography:
Jordan, B., 2014. Fundamentals of investments. McGraw-Hill Higher Education
Titman, S. and Martin, J.D., 2014. Valuation. Pearson Higher Ed
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