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.
