Name Subject Lecturer

: : :

Bayu Anggara Silvatika Financial Mangement Prof. Dr. Ahmad Rodoni

Referensi Chapter Questions

: : :

"Fundamentals of Corporate Finance" 9th Ed. By Ross/Westerfield/Jordan Ch. 7 Page 226-230 Ch. 8 Page 255-258 Nomor Ganjil

CHAPTER 7 Page 226 (Basic) No. 1

INTEREST RATES AND BOND VALUATION Answers Yield to maturity (YTM) is The rate required in the market on a bond. Yes, YTM is the same thing as the required return in the rate. Coupon rate is The annual coupon divided by the face value of a bond. There are difference between YTM and Coupon rate. Coupon rate use to determine the value of bond at a particular in time, but YTM use to estimate bond's current market value. Coupon rate = 10%; and YTM = 8%. Staind, Inc., coupon bonds=7.5%; maturity 10 years; Annual payments. If YTM=8.75%, so current bond price? Current bond price = { (FV x 7.5%) x ([ 1 - (1 /(1 + 8.75%) 10 )] / 8.75%) } + { FV / (1 + 8.75%) } Kiss the Sky Enterprises, annual payment; maturity 13 years; selling for $1,045; yield=7.5%. Coupon rate? Assuming FV = $1,000; so 1,045 = { (1,000 x CR%) x ([ 1 - (1 /(1 + 7.5%) 13 )] / 7.5%) } + { 1.000 / (1 + 7.5%) 13} 8.125840255 390.5619808 1.045 = ((1.000 x CR%) x 8.1258) + 390.56 = ((1045-390.56)/8.1258)/1000 Coupon Rate = 8.05% Ngata Corp., maturity 10 years (12-2); coupon rate=8.4%; semiannual payment; current bond price =105% of par value, so YTM? Assuming FV = 1.000 Current bond price = { (FV x CR%) x ([ 1 - (1 /(1 + YTM) t )] /YTM) } + { FV / (1 + YTM)t} 1050 = { (42) x ([ 1 - (1 /(1 + YTM) 10 )] /YTM) } + { 1000 / (1 + YTM)10} =((42+((1000-1050)/10))/((1000+1050)/2))*100% YTM = 3.61% The nominal rate is approximately equal to the sum of the real rate and the inflation rate. Real rate interest + 3.8% = 7% The approximately real rate interest is 3.2%. 1 + R = (1 + r) x (1 + h) 1+7% = (1+r) x (1+3.8%) =(1.07/1.038) -1 The exact real rate is 3.08%. Nominal return = 14%; Real return = 9%; Inflation rate? The approximately inflation rate is 5%; =(1.14/1.09)-1 The exact inflation rate is 4.59%. Figure 7.4; maturing in November 2027. This is a bond prices or treasury note. Coupon rate is 8%; Its bidprice is 136:29, actually translates into 136 29/32, or 136.90625 % of face value. The asked price from the previous day is 5/32 of 1%, or 0.15625 %. Bond X: coupon rate 8%; YTM 6%; maturity 13 years; annual payments. Bond Y: coupon rate 6%; maturity 13 years; annual payments. Assuming FV is $ 1.000. Bond Price X Y 1 year 1,018.87 981.48 3 years 1,053.46 948.46 8 years 1,124.20 885.07
13 years
10

3 5

227

11

13 15

(Intermediate)

$ $

$ $

$ $

12 years $ 1,167.68 $ 849.28

13 years $ 1,177.05 $ 841.92

Graphing bond prices versus time to maturity

$1.177,05 $1.167,68 $1.124,20

12 years
8 years

3 years

1 year

Bond Value ($)

$1.053,46 $1.018,87 $ 981,48 $ 948,46 $ 885,07 $ 849,28

$ 841,92

Interest Rate (%)

17

Bond J = coupon rate 4%; maturity 9 years; semiannual payments; YTM 8% Bond K = coupon rate 12%; maturity 9 years; semiannual payments; YTM 8%. Jika IR turun 2% J $ 851.29 $ 786.77 $ 922.14 -8% K $ 1,148.71 $ 1,071.08 $ 1,233.58 -7% If interest rates rise by 2%, so the price of bond J will fall by 8% and bond K also fall by 7%. If interest rates fall by 2%, so the price of bond J will rise by 8% and bond K also rise by 7%. Higher interest rates, lower the price bonds. And lower interest rates, higher the interest rates. Bond Price Awal Jika IR naik 2% Maka BP turun Maka BP naik 8% 7%

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19

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Seether Co., maturity 20years; coupon bonds 8%; bond price $930; semiannual payments. Bond yield? Current bond price = { (FV x CR%) x ([ 1 - (1 /(1 + YTM) t )] /YTM) } + { FV / (1 + YTM)t} 930 = { (40) x ([ 1 - (1 /(1 + BY) 40 )] /BY) } + { 1000 / (1 + BY) 40} =((40+((1000-930)/40))/((1000+930)/2))*100% Bond Yield = 4.33% Bond; coupon rate 6.8%; clean price $1.073; semiannual payment; due to in two months. The invoice price? The Invoice Price = Dirty price = 1.073 + (0.5 x 6.8% x 1.000 x 2/4) = 1.073+17 = $ 1.090. Company (Ticker) IOU (IOU) Coupon 7.2 Maturity 15-Apr-23 Last Price 108.96 Last Yield ? EST (000s) 1,827

23

Current Yield = Annual Interest / Current Price Current date is April 15, 2009 and FV is $ 1.000. Current bond Price = { (FV x CR%) x ([ 1 - (1 /(1 + YTM) )] /YTM) } + { FV / (1 + YTM) } 1.827 = { (72) x ([ 1 - (1 /(1 + YTM) 23 )] /YTM) } + { 1000 / (1 + YTM)23} =((72+((1000-1827)/23))/((1000+1827)/2))*100% YTM is 2.55 % Last Yield is YTM = 2.55% Current Yield = (2.55% x 1.000)/1.827 =(2.55%*1000)/1827 Current Yield is 1.40% Tesla Corporation; ZCB maturity 25 years; required return 9%; a) These bonds sell at a price that is much lower than its stated value. The Initial Price is $ 115.97 Assuming FV is $1.000 b) Using IRS amortization role, interest deduction is $ ((1.000-115.97)/25) = $ 35.36 c) Repeat part b) using the straight-line method for the interest deduction. Year 1 2 3 4 5 6 7 8 9 10 11 12 Beginning Value $ $ $ $ $ $ $ $ $ $ $ $ 115.96 126.40 137.78 150.18 163.70 178.43 194.49 211.99 231.07 251.87 274.54 299.25 $ $ $ $ $ $ $ $ $ $ $ $ Ending Value 126.40 137.78 150.18 163.70 178.43 194.49 211.99 231.07 251.87 274.54 299.25 326.18 Implicit Interest Expense $ $ $ $ $ $ $ $ $ $ $ $ 10.44 11.38 12.40 13.52 14.73 16.06 17.50 19.08 20.80 22.67 24.71 26.93 Stright-line Interest Expense $ $ $ $ $ $ $ $ $ $ $ $ 35.36 35.36 35.36 35.36 35.36 35.36 35.36 35.36 35.36 35.36 35.36 35.36 Year 14 15 16 17 18 19 20 21 22 23 24 25 $ $ $ $ $ $ $ $ $ $ $ $ Beginning Value 355.53 387.53 422.41 460.43 501.87 547.03 596.27 649.93 708.43 772.18 841.68 917.43 TOTAL Ending Value $ $ $ $ $ $ $ $ $ $ $ $ 387.53 422.41 460.43 501.87 547.03 596.27 649.93 708.43 772.18 841.68 917.43 1,000 $ $ $ $ $ $ $ $ $ $ $ $ Implicit Interest Expense 32.00 34.88 38.02 41.44 45.17 49.23 53.66 58.49 63.76 69.50 75.75 82.57 Straight-line Interest Expense $ $ $ $ $ $ $ $ $ $ $ $ 35.36 35.36 35.36 35.36 35.36 35.36 35.36 35.36 35.36 35.36 35.36 35.36
t t

25

13 $ 326.18 $ 355.53 $ 29.36 $ 35.36 $ 884.0 $ 884.0 d) According part b) and c), Tesla Corporation prefer Straight-line method because the deductions for interest expense were stabil but if use the implicit interest method were larger in the early years. 229 27 Coupon bond 10%; maturity? Maturity is the specified date on which the principal amount of a bond is paid. t 1000 = 1000/(1.1) Assuming future value is same as present value. t = 0 year. Descript. Bond P Bond D Premium Bond Discount Kind 12% Coupon 6% Coupon Coupon Annual Payment Payment 9% YTM 5 years Maturity $ 120.00 $ 60.00 Annual Interest $ 1,116.69 $ 883.31 Current Price 10.75% 6.79% Current Yield Expected Capital 9.06% 10.49% Gains Yield The relationship between current yield and expected capital gain yield is lower current yield, so higher expected capital gain yield. The Mc Keegan Corporation Descript. Bond M Bond N Periode Bond M Face Value $ 20,000 20 years 40 Maturity No Payment No Payment 1 First six years semiannual until 6 $ 1,100 No Payment 11 years $ 1,400 No Payment 28 over 6 years Semiannual 7% compound $ 6,339.21 $ 5,051.45 Current Price Treasury Bond in The Wall Street Journal Coupon Bid Asked Change Asked yield Maturity 9-May-09 9125 100:03 100:04 -2.15 YTM negative? Anyone would buy this Treasury bond with negative YTM use other analysis, because the bond yields (YTM) only represent the combined effect of no fewer than six things. The first is the real rate of interest. On top of the real rate are five premiums representing compensation for (1) expected future inflation; (2) IRR; (3) default risk; (4) taxibility; and (5) lack of liquidity.

(Challenge)

29

31

33

35

Planning for retirement, over 30 years, invest $900 a month in a stock and $450 a month in a bond. The stock have annual expected return 11% and bond 7%; When retairement, I will combine in an account with a 9% effective return. Inflation this periode 4%. How much can i withdraw each month from account in real terms assuming a 25year with drawal period?the nominal dollar amount of my last withdral? Descript. each month expected return periode (25-30) y $ PV Withdrawal @month $ combine $ effective return inflation $ PV The Stock 900 11% 60 103.04 $ 103.04 $ The Bond 450 7% 60 465.95 465.95 568.99 9% 4% 1,827.67

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Name Subject Lecturer

: : :

Bayu Anggara Silvatika Financial Mangement Prof. Dr. Ahmad Rodoni

Referensi Chapter Questions

: : :

"Fundamentals of Corporate Finance" 9th Ed. By Ross/Westerfield/Jordan Ch. 7 Page 226-230 Ch. 8 Page 255-258 Nomor Ganjil

CHAPTER 8 Page 255 (Basic) No. 1

STOCK VALUATION Answers The Jackson-Timberlake Wardrobe Co. devidend $1.95 per share, rate constant 6%. If investor require 11% return, Current Price? The price in 3 years? 15 years? Po = EPS / r In 3 years and 15 years, the price is constant ($ 32.5) Po = 1.95/0.06 Because the rate is constant. Po = 32.5 If r = 11% r = {EPS/Po} + {(P1-Po)/Po} 11% = 6% + {(P1-32.5)/32.5} P1 = 34.125 So, the current price is $ 34.125. From the previous problem, the dividend yield is 5%; the expected capital gain yield is 14.29% or (48-(2.10/5%))/(2.10/5%)). R = (D1/Po) + g Dividend yield 6.3% (D1/Po) = Divident yield Required return ( R) = 6.3% + 5.2% = 11.5% Apocalyptica Corp.; dividend $ 9.75; for 11 years; required return 10%. The current share price? The current price = Po x (1 + g)11 The current price = 9.75 x (1 + 10%)11 The current price = $ 27.82 Red Inc., Yellow Corp., and Blue Company; devidend $2.35 next year. The growth rate 5%; The required return 8%, 11%, 14%. The stock price?the relationship between the required return and stock price?

3 5

256

(Intermediate)

Red Inc. Yellow Corp. Blue Company $ 2.35 $ 2.35 $ 2.35 Dividend Growth rate 5% 5% 5% Required return 8% 11% 14% Stock price $ 78.33 $ 39.17 $ 26.11 The relationship between the required return and stock price is Higher required return, lower the stock price. 11 Metallica Bearings. Periode Dividend 0-9 No 10 $ 10 next increase 5% If the required return 14%, the current share price? D1-9 0 D10 $ 2.70 P10 D10 x (1+5%)/(14%-5%) $ 31.47 (D1/(1+14%)1) + (D2/(1+14%)2) + + P10/(1+14%)10) P0 = $ 9.22 So, the current price is $ 9.22. 13 Far Side Corporation; dividend 4 years with expected to pay $11; $8; $5; dan $2. growth rate: 5%; required return 12%. The current price? Periode Devidend P(t) 1 $ 11 $ 9.82 2 $ 8 $ 6.38 3 $ 5 $ 3.56 4 $ 2 $ 1.27 P4 $ 19.07 $ 12.12 $ 33.15 The current price is 15 Eva Corp. Year 1 =76*1.25 2 =96*1.25 3 =120*1.25 P3 The current price is Total Dividend $ $ $ $ P(t) 96 120 151 960.56 $ $ $ $ $ 88.67 102.88 120.03 762.53 1,074.10

The devidend coming year is $ 53.705, or $(1.074,10/20), if there were 20 million share. 17 Teder Corporation; currently stock $64 per share. Required return 10%; growth rate constant 4.5%. The most recent dividend per share? Po = D1 / (R-g) D1 = P0 x (R-g) D1 = 64 x (10% - 4.5%) D1 = 3.52 D1 = D0 x (1 + g) D0 = D1 / (1+g) D0 = 3.52 / (1+4.5%) D0 = 3.37 So, the most recent dividend is $ 3.37 per share.

257

19 RJW Enterprise, Inc. 52-week HI LO STOCK (DIV) YLD (%) PE VOL (100S) CLOSE NET CHG 72.18 53.17 RJW 1.48 2.1 19 17652 ?? -.23 The closing price for this stock is $ (53.17 - 0.23), or $ 52.94 per share. If company has 25 million shares, net income for the most recent four quarter is $ (52.94 x 25 million), or $ 1.323,50 million. 21 Chartreuse Country Choppers Inc.; dividend growth at 25% per year for the next 11 years before leveling off at 6% into perpetuity. The required return 12%. If dividend per share just paid was $ 1.74, the stock price? P11 = { D12 / (R-g2) } = { [D0 x [ (1+g1) 5 ] x (1+g2) ] / (R-g2) } P11 =(1.74*((1+25%)^11))*((1+6%))/(12%-6%) $ 357.86 Stock price 11 years is $ 357.86. Po = D1 / (R-g1) x [ 1 - {((1+g1)/(1+R)) t} + [Pt /((1+R)t)] Po = (((1.74*1.25)/(12%-25%)) * (1-((1.25/1.12)^11)))+ (E89/((1.12)^11)) $ 142.14 So, the stock price today is $ 142.14. 23 a) Currently pays a $3.20 annual dividend, raising this dividend by 6% per year indefinitely. If the required return 12%, the current share price? Periode Devidend 1 $ 3.20 P1 $ 50.48 The current price is P(t) $ $ $ 2.86 45.07 47.93

(Chalange)

b) Quarterly installments, just paid a $ .80 dividend per share, as it has for the previos three quarters. The current share price? Periode Devidend P(t) 3/4 $ 0.80 $ 0.73 P1 $ 12.98 $ 11.92 $ 12.66 The current price is 258 25 Storico Co. has the current share price $ 63.82, according the previous problem. Rate of return? Dividend $ 2.45, increase dividend by 20%; reduce growth rate by 5% and reach average 5% dividend constant growth. P1 = { D2 / (R-g2) } = { [D0 x [ (1+g1)1 ] x (1+g2) ] / (R-g2) } P1 =(2.45*((1+20%)^1))*((1+5%))/(R-5%) = 2.94 * (1.05/(R-5%) Po = D1 / (R-g1) x [ 1 - {((1+g1)/(1+R)) t} + [Pt /((1+R)t)] Po = (((2.45*1.20)/(R-20%)) * (1-((1.20/((1+R))^1)))+ ( (2.94 * (1.05/(R-5%))/((1+R)^1)) Trial and error R P0 Po (Current) 0% -58.8 10% 58.8 63.82 9% 73.5 So, the rate of return is between 9% to 10%. Rate of return is 9.66% 27 The Formula of The Price of a Share of Stock Today Po = Do x (1+g1) (R-g1) x [ 1 - ((1+g1)/(1+R))t] + ((1+g1)/(1+R))t x D0 x (1+g2) (R-g2)

Present Value of amount stock and Total dividend, with first rate of return (g1)

Present Value of amount stock and Total dividend, with second rate of return (g2) and adjusted from g1 to g2.

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