MGT411 Assignment2 Idea Solution July 2010

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MGT411 Assignment#2 Idea Solution.

Question#1 Solution:
Bond Valuation

Part a)
Bond value = c [1 – 1/(1+r)^n / r] + Par/(1+r)^n
Bond value = 90 [1 – 1/(1+0.10)^12 / 0.10 + 1000/(1+0.10)^12
Bond Value = 90 [1 – 0.3186 /0.10] + 1000/3.1384
Bond value = 90 (6.814) + 318.63
Bond value = 613.26 +318.63
Bond Value = 931

Part b)
Bond value = c [1 – 1/(1+r)^n / r] + Par/(1+r)^n
Bond value = 45 [1 – 1/(1+0.05)^24 / 0.05 + 1000/(1+0.05)^24
Bond Value = 45 [1 – 0.3100 /0.05] + 1000/3.2250
Bond value = 45 (13.8) + 310.07
Bond value = 621 +310.
Bond Value = 931

Part a)
P = Div(1+g)/rF +rP – g

D = 1.80
Rce = rF +rP = 12% \
g = 5%

P = 1.80 (1+0.05) / 12% - 5%
P = 1.80 (1.05) / 7%
P = 1.89/0.07
P = 27

Part b)
Div1= Do(1+g)3
Div1= 1.80 (1+0.05)3
Div1= 1.80 (1.1576)
Div1 = 2.083

P0 = D0 x (1 + g)/(R – g)
P0= 2.083 x 1.04/(0.12 – 0.04)
P0= 2.166 / 0.08
P0= 27.075


Question 2 Solution


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