Which of the following document/s is/are used to prepare a financial plan?
A financial plan documents an individual’s long-term financial goals and … The following steps in creating a financial plan may, of course, … You can’t create a financial plan without knowing where your money is … Don’t overlook cash withdrawals that may be used on sundries from shampoo to sodas.
Money market is a place where short term debt instruments are traded the volume of transaction is large while number of transactions are small. For example certificates of deposits and commercial papers are traded in money market.
IA new investor wants to add bonds and shares in his portfolio and he has two options available with the following information.
I. Company ABC issued a five-year bond with face value of Rs.1,000. The bond offers 12% semiannual coupon payment. The market interest rate for such type of investment is 14% per annum while current market price of bond is Rs.940.
II. The stock of company XYZ is being sold at Rs.54 per share while the forecasted dividend is Rs.6 for first year and Rs.7 for the second year. The price of the stock after year 2 is expected to be Rs.55. The Company paid most recent dividend as Rs.5 whereas the rate of return for such type of investment is 14% per annum.
You are required to help the investor in valuation of both investment options by calculating:
Intrinsic value of the bond. (8 marks)
Intrinsic Value of stock today. (8 marks)
Identify either bond and stocks are overvalued or undervalued. Justify your answer with proper calculation and reasoning. (4 Marks)
Intrinsic value of the stock
Do = Current dividend = Rs.5 D1 = Rs.6
D2 = Rs.7
Value of Stock:
Po = D1/ (1+i)n + D2/ (1+i)n + P2/(1+i)n Po = 6/ (1.14)1+ 7/ (1.14)2 + 55/ (1.14)2 Po = 5.26+5.39+42.32
Po = Rs.52.97
Bond and Stock valuation Solution
Overvaluation or undervaluation of securities
Bond is overvalued because market price is more than intrinsic value i.e. Market price > Intrinsic value
940 > 929.76
Stick is also overvalued as its market price is more than its intrinsic value i.e. Market price > Intrinsic value
54 > 52.97
Grand Quiz Syllabus and Schedule
Due to the prevailing circumstances, Grand Quiz will be conducted to replace Proctored Mid-Term Exam in this course of MGT201. You can attempt Grand Quiz within 24 Hours. So it is advised to be proactive since there will be no extension.
Number of Questions
Types of Questions
Dec 28, 2020 at 12:00 AM
Dec 28, 2020 at 11:59 PM
Video Lecture 1-22
You must attempt your Grand Quiz effectively as it is being held as your mid-term exam and it would be equivalent to 20% of the overall course weightage.
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Investing Rs. 100,000 at 12% interest rate compounded semiannually for 10 years
Depositing half of investment amount in a saving account for 10 years that pays 10 % interest rate compounded annually and investing remaining half amount at 12% interest rate compounded annually for 10 years.
Calculation of both Option
Semi Annual Yearly Compounding
FV = PV x (1 + i/2) 2n
FV = 100,000 x (1 + 0.12/2) 2 x 10
FV = 320713.5
FV= PV (1 + i) n
FV = 50,000 (1+0.12) 10
FV = 155292.4
Option 1 is best for Mr. Ahmad because the value of FV is grater than Option 2