MGT201 GDB Spring2022 Virtual Guidance

 

                                                  MGT201 GDB Spring2022

 

1.        Calculation of Intrinisic value of a Bond=?

 

In this case  this is perpetual bond because it is issued for infinite time period.

 

Formula for calculation o intrinsic value of a perpetual Bond

 

V=Interest/required rate

 

Values given

 

Face value=1000

 

Annual coupon=12%

 

Market Price M.P=980

 

Required rate of return(r)=15%

 

Putting values in formula of Intrinsic value of a perpetual bond for calculation

 

First of all calculate interest

 

Interest =  1000 X 12%

 

Interest = 1000 X 12/100

 

Interest = 120

 

V = Interest/required rate

 

V = 120/15%

 

V = 120/15 X 100

 

V = 800

 

MP = 980

 

IV = 800

 

M.P > Intrinsic value

 

Intrinsic value of a perpetual bond is Overvalued.

 

2.        Calculation of intrinsic value of a preferred Stock =?

 

Given values

 

Face value = 80 per share

 

Annual dividend = 10%

 

Market Price = 75

 

Required Rate of Return = 15%

 

Formula for calculation of Intrinsic value of a preferred stock

 

V=D/r

 

V = Dividend/required rate

 

First of all calculate value of Dividend

 

 Dividend = 80 X 10%

 

Dividend = 80 X 10/100

 

Dividend = 8

 

Putting values in Equation

 

V =8/15%

 

V = 8/15 X 100

 

V = 53.33

 

MP = 75

 

IV = 53.33

 

M.P > Intrinsic value

 

Intrinsic value for preferred stock is Overvalued.

 

 

3.        Calculation of Intrinsic value of a common stock with constant growth = ?

 

Given values

 

Face value = 100 per share

 

Last year Dividend D = 10%

 

Growth rate (g) = 5%

 

Market value = 80

 

Required rate of return(r) = 15%

 

Formula for calculation of Intrinsic value of a common stock with constant growth

 

 V = D1/r-g

 

D1 = Next years dividend

 

D1 = ?

 

D1 = D0(1+g)

 

D1 = 10(1+5%)

 

D1 = 10.5

 

Putting values in Intrinsic value eqation

 

V =D1/r-g

 

V = 10.5/15%-5%

 

V = 10.5/10%

 

V = 105

 

MP = 80

 

IV = 105

 

M.P < Intrinsic value

 

So Intrinsic value for common stock is Undervalued.

 

 

Part B Solution:

 

According to calculations of three stocks we have concluded that result that IV of

 

Common stock is preferable.

 

Due to following resons

 

1.      When IV < Market price it is not profitable

 

2.      When IV > Market price it is profitable

 

3.      It is greater that market price ony in common stock case and it is undervalued.

 

4.       So common stock with constant growth is recommended.