## Wednesday, November 20, 2019

### BUSINESS FINANCE Assessment 1 Research Paper Example | Topics and Well Written Essays - 4250 words

BUSINESS FINANCE Assessment 1 - Research Paper Example Q3) Face Value = \$1000 N= 30 years Coupon rate = 8% (a) YTM if Price is \$900. Since Price YTM > coupon rate. Price at 9%: 80 x PVIFA (9%, 25yr) + 80/ (1.09) ^26 + 80/ (1.09) ^27 + 80/ (1.09) ^28 + 80 / (1.09) ^29 + 1080/ (1.09)30 = \$ 897.3 Price at 7%: 80 x PVIFA (7%, 25yr) + 80/ (1.07) ^26 + 80/ (1.07) ^27 + 80/ (1.07) ^28 + 80/ (1.07) ^29 + 1080/ (1.07)30 = \$ 1123.8 Price at 8%: \$1000 By interpolation, YTM = 8% + (1000-900)/ (1000-897.3) YTM = 8.97% (b) YTM if Price is \$1000. Since Price = Face value YTM = Coupon Rate Hence YTM = 8%. (c) YTM if Price is \$1,100 Since Price > Face Value YTM Price at 7% = \$1123.8 Price at 9% = \$897.3 By interpolation, YTM = 7% + (1123.8-1100)/ (1123.8-897.3) YTM = 7.11% (d) The relationship between yield to maturity and bond price is that the yield to maturity is that discount rate that makes the present value of the bond's coupon payments equal to its price. Q4) a) Eps = \$6, r = 15%, ROE = 15%, G =, Price = (i) Plowback ratio = 0 % g = ROE x Plowback ratio = 0.15 x 0 g = 0% Po = Div/ r -g Since nothing is plowed back in the firm, all the earnings are given out as dividends, therefore Div = 6 Po = 6/ 0.15-0 Po = \$ 40 (ii) Plowback ratio = 40% g = ROE x Plowback ratio = 0.15 x 0.4 g = 0.06 or 6% Po = Div/ r -g Since 40% is plowed back, 60% is given out as dividends, therefore Div = 6 x 0.6 = 3.6 Po = 3.6/0.15-0.06 Po = \$ 40 (iii) Plowback ratio = 60% g = ROE x Plow back ratio = 0.15 x 0.6 g = 0.09 or 9% Po= Div/r-g Since 60 % is plowed back, 40% is given out as dividends, therefore Div = 6 x 0.4 = 2.4 Po = 2.4/ 0.15 - 0.09 Po = \$ 40 b) Eps =\$6, r =15%, ROE = 20%, g =, P = i) Plowback ratio 0% g = ROE x Plowback ratio = 0.2 x 0 g = 0% Po =... Since project E has the highest profitability index, it should be chosen first and then project C. Since the investment budget is of \$ 8 million, investing in these two projects would also equal to \$ 8 million. Since X Ltd has a higher standard deviation, it means there is more risk and a greater variation of returns and thus a high chance that the expected return will not originate. Co-efficient of variance is another measure of determining riskiness of a business and since X Ltd also has a higher co-efficient of variance, it signifies that it's a more risky business. Thus 100% investment in Y Ltd is a better investment. Other than that, if recession hits the economy, X Ltd will completely go out of business. This is one more reason for not opting for investment in X Ltd. d) Value investors are those who use dividends to value their investments. Regular income is wanted by them and they look for quality companies with earnings records and projects they believe the market has under-valued. They tend to hold the under valued stocks for a longer duration and eventually take advantage of the rise in share price that the earnings growth brings in the long run. Growth investors are those who use stock prices to value their investments.