1

2010 University of South Africa

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Printed and published by the
University of South Africa
Muckleneuk, Pretoria
FIN2601E/1/2012-2018
98769170
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2
(iii) FIN2601/1/2012-2018
&217(176
3page
INTRODUCTION iv
PURPOSE OF THIS MODULE iv
FREQUENTLY ASKED QUESTIONS iv
USE OF ICONS vii
TOPIC 1: INTRODUCTION TO MANAGERIAL FINANCE 1
STUDY UNIT 1: THE ROLE AND ENVIRONMENT OF MANAGERIAL FINANCE 3
STUDY UNIT 2: FINANCIAL STATEMENTS AND ANALYSIS 9
TOPIC 2: IMPORTANT FINANCIAL CONCEPTS 15
STUDY UNIT 3: TIME VALUE OF MONEY 17
STUDY UNIT 4: RISK AND RETURN 23
STUDY UNIT 5: INTEREST RATES AND BOND VALUATION 31
STUDY UNIT 6: STOCK VALUATION 37
ANNEXURE 1: Financial Tables 45
(iv)
,1752'8&7,21
4Welcome to the world of nance. As we enter the period after the global nancial crisis of
2008 2009, the challenge of nancial management is greater than ever. We have seen
tremendous changes in the nancial markets and systems in South Africa and globally
in recent years.
5These changes should be reected in the way we teach the nancial management module.
In this second-year module, we attempt to give you a foundation in nance and equip
you with the tools that you will need to tackle the later modules in this discipline. Our
approach is intended to give you a rm grasp of the underlying principles of nancial
management. This means that it is not sucient to simply substitute gures in a formula
and crunch numbers without understanding the context and meaning of the answers.
6We hope that this module will contribute to your understanding of nancial management.
1 PURPOSE OF THIS MODULE
7This module will be useful to students who are following or plan to follow a career in
nance and other nance-related disciplines such as investments, banking and risk man-
agement. It is designed to equip students with knowledge of the fundamental principles
of nancial management theory and practice.
8Students credited with this module should be able to
y
demonstrate an understanding of the markets and environment within which
nancial management is practised
y
apply nancial management concepts and principles relating to nancial state-
ment analysis
y
apply techniques relating to the time-value of money to value nancial instruments
within a risk-return framework
2 FREQUENTLY ASKED QUESTIONS
9The prescribed book
10Do I have to buy a prescribed book or can I just use the study guide?
11You should buy the prescribed book as soon as possible after you have registered for
the module Financial Management (FIN2601). Bookstores could run out of stock, which
may cause an unnecessary delay in your studies. You should study the chapters of the
prescribed book as indicated in the study guide.
12Make sure that you purchase an access kit for the MyFinanceLab website. The kit includes
your access code.
(v) FIN2601/1/2012-2018
13I cannot get hold of the edition of the prescribed book specifed in Tutorial Letter
101. May I use another edition?
14The study guide for Financial Management (FIN2601) was developed in a way that permits
the use of any edition (including the brief editions) of the prescribed book: Gitman, LJ.
2010. Principles of managerial nance: Global and Southern African perspectives. Cape
Town: Pearson/ Prentice Hall South Africa.
15I can buy a second-hand prescribed book, but it is not the same edition as the one
prescribed in Tutorial Letter 101.Can I use it or will I be at a disadvantage if I use
an earlier edition?
16You will not be at any disadvantage if you use an earlier edition of the prescribed book.
As indicated above, the study guide for Financial Management (FIN2601) was developed
in a way that permits the use of any edition. However, you will still need to purchase the
access kit for the MyFinanceLab website.
17My local bookstore does not have any copies of the prescribed book.
Can you provide me with the details of bookstores that may have the book in stock?
18The list of ocial booksellers appears in the Unisa booklet entitled University of South
Africa: Services and procedures. The booksellers do not inform us of their stock levels and
we cannot at any particular point in time say where you will be able to buy a particular
prescribed book.
19May I use any alternative books?
20We strongly recommend the use of the prescribed book. You are welcome to consult
additional reading material, but the examination paper is based on the prescribed book.
21Which specifc pages do I need to study and which can I leave out?
22The chapters you should study are indicated in your study guide. The study guide will
indicate if any pages may be left out.
23Could you highlight the most important aspects of each chapter?
24Some students are inclined to study only the most important aspects. This may prove
to be disastrous in the examination. All aspects of the prescribed chapters should be
regarded as important for the examination.
25Study guide and tutorial letters
26I have lost my study guide. Could you please mail or fax me a copy?
27Please order replacement copies of study guides from the Despatch Department (tel:
012 429 4104). We do not mail or fax copies of study guides to students.
28
(vi)
29I have lost one of my tutorial letters. Could you please mail or fax me a copy?
30Please order replacement copies of tutorial letters from the Despatch Department (tel:
012 429 4104).We do not mail or fax copies of tutorial letters to students. Alternatively
download the tutorial letter from the myUnisa website.
31Assignments
32My assignment is late because . May I submit it at a later date?
33It is your responsibility to ensure that your assignment reaches Unisas Muckleneuk
Campus on or before the closing date. Please do not call us to request an extension for
the submission of an assignment. Multiple-choice assignments are marked (by a mark-
reading device) on a xed date as specied in advance in the planning schedule of the
Assignments Section. Hence multiple-choice assignments submitted after the closing
date will not be marked.
34Calculators
35Are we allowed to use a calculator?
Yes. In fact we would like to encourage you to use a nancial calculator.
We recommend the HP10BII calculator only.
36Are we allowed to use a programmable calculator in the examination?
No.
37Group discussion classes
38Is it compulsory to attend the group discussion classes?
No.
39Where will the group discussion classes take place?
40Details of the group discussion classes appear in the tutorial letter. You will be advised
via SMS and the details will also be posted on the myUnisa forum.
41Supplementary books and videos
42Are there any supplementary books that I can use?
No supplementary books are prescribed.
43Is there a workbook available that could help me prepare for the examination?
Yes. Marx, J. (1996). Financial management workbook. Johannesburg: Heinemann.
Contact one of the ocial booksellers if you are interested in obtaining a copy.
44Examination
45Are any previous examination papers available?
46Yes. These are posted on the myUnisa website.
(vii) FIN2601/1/2012-2018
47What will the format of the examination paper be?
The examination paper consists of 40 multiple-choice questions (worth 1 mark each)
and one or two long questions (worth 30 marks). The total mark is 70 and the duration
of the paper two hours.
48Will the examination paper contain any theory questions or will there only be cal-
culations and interpretations?
49Most of the questions involve calculations and interpretations.
50Will I be provided with all the fnancial tables (containing the present and future
value factors) or should I memorise them?
51The nancial tables will be provided as an annexure to the examination paper.
52Will all the equations be provided as an annexure to the examination paper?
53No equations will be provided. You have to know all the equations and be able to apply
them in the examination.
54Can you give me any tips on the examination?
55No tips are provided to students.
56I am going overseas weeks before the examination results are due to be released.
Could you please tell me what mark I received for this paper?
57No results are released prior to the dates set by the Examination Section. Please do not
call the Department of Finance and Risk Management and Banking to request your results.
3 USE OF ICONS
58The following icons are used in this study guide. An explanation of each icon is provided
below:
Learning outcomes. The learning outcomes indicate what aspects
of the particular topic or study unit you have to master (i.e. know
and understand).
Assessment criteria. The assessment criteria indicate on what as-
pects of the particular topic or study unit you will be tested/exam-
ined and demonstrate that you have mastered the study material
(i.e. competence).
Key concepts. Attention is drawn to certain keywords or concepts
that you will come across in the topic or study unit.
(viii)
Overview. The overview provides the background to a particular
topic or study unit.
Activity. These self-assessment activities should be performed in
order to develop a deeper understanding of the learning material.

Feedback. Feedback is provided on the self-assessment activities.
Read. This icon will direct you to read certain sections of the pre-
scribed book for background information.
Study. The Study icon indicates which sections of the prescribed
book you need to study (i.e. learn, understand and practise).
Assessment. When you see the Assessment icon you will be re-
quired to test your knowledge, understanding, and application of
the material you have just studied.
Summary. This section provides a brief summary of what was
covered in a particular study unit and what can be expected in the
following study unit(s).
Checklist. After completion of a particular study unit, you should
conrm that all learning outcomes were in fact achieved and that
you comply with the assessment criteria.
1 FIN2601
TOPIC 1
INTRODUCTION TO MANAGERIAL
FINANCE
1AIMS
The aims of this topic are to
(1) provide an overview of the fnancial managerial function of an enterprise
(2) characterise the operating environment of the enterprise
(3) review the analysis of fnancial statements and the relevance of such statements to the
business
INTRODUCTION
59Topic 1 is divided into the following two study units (SUs):
60SU 1: The role and environment of managerial nance
61SU 2: Financial statements and analysis
62Since each study unit has its own particular objective, we shall now deal with each of
them separately.
2
63
3 FIN2601
Study unit 1
THE ROLE AND ENVIRONMENT OF MANAGERIAL
FINANCE
TUTORIAL MATTER
Study chapter 1 in your prescribed book.
CONTENTS
64Tutorial matter
65Learning outcomes
66Overview
67Self-assessment
68Activity
69Key concepts
70Summary
71Checklist
LEARNING OUTCOMES
After working through this study unit you should
y
be able to define the functions of a finance manager
y
be able to discuss the legal forms of business organisation
y
be able to describe the managerial finance function and its relationship to
economics and accounting
y
be able to explain the goal of the enterprise and finance-related concepts such as
corporate governance and the agency problem
y
understand financial institutions and the role they play in managerial finance
y
be able to discuss business taxes and their importance in financial decisions
1ASSESSMENT CRITERIA
Financial management is central to the operations of any business entity. Students will
be expected to discuss the activities of a fnance manager. They will also be expected to
discuss, in detail, agency relationships; conficts that may arise between shareholders
and managers and between shareholders and the providers of debt. A demonstrable
understanding of the fnancial markets and its operations will be expected.
4
OVERVIEW
This study unit introduces you to the eld of nance and career opportunities in both
nancial services and managerial nance. The three basic legal forms of business (sole
proprietorship, partnership and company), their strengths and weaknesses, and the
relationship between the major parties in a company are described. The managerial
nance function is dened and dierentiated from economics and accounting. This
is followed by a summary of the three key activities of the nancial manager: nan-
cial analysis and planning, investment decisions and nancing decisions. The nancial
managers goals (maximising and preserving shareholder wealth) and the role of eth-
ics in meeting these goals are then discussed. The agency problem is also reviewed.
This study unit also presents a broad overview of the operating environment of the en-
terprise. It focuses on the nancial environment in which the enterprise interacts with
institutions, nancial markets and the government. The role of domestic and international
nancial markets, the money market and capital markets is explained with reference to the
fundraising activities of the enterprise. This is followed by a description of the characteristics
of debt and equity securities, and the securities exchanges where these securities are traded.
The concepts of interest rates, required return, risk-return trade-os and the term struc-
ture of interest rates (which reveals the economic environment in which the enterprise
operates) are integral to an understanding of securities and markets. The study unit con-
cludes with a discussion of the impact of taxation on the enterprises nancial activities.
SELF-ASSESSMENT
(1) Managerial fnance
(1) involves tasks such as budgeting, fnancial forecasting, cash management and
funds procurement.
(2) involves the design and delivery of advice and fnancial products.
(3) recognises funds on an accrual basis.
(4) devotes most of its attention to the collection and presentation of fnancial data.
(2) The primary emphasis of the fnancial manager is the use of
(1) accrued earnings.
(2) cash fow.
(3) organograms.
(4) proft incentives.
(3) Which one of the following is not a key activity of the fnancial manager?
(1) making fnancing decisions
(2) fnancial analysis and planning
(3) managerial fnancial accounting
(4) making investment decisions
(4) Which of the following legal forms of business organisation is most expensive to
organise?
(1) sole proprietorships
(2) partnerships
5 FIN2601
(3) corporations
(4) limited partnerships
(5) Which of the following is not an agency cost?
(1) bonding and structuring expenses
(2) cost of goods sold
(3) monitoring expenditures
(4) opportunity costs
(6) The is created by a fnancial relationship between suppliers and demanders of
short-term funds.
(1) stock market
(2) capital market
(3) fnancial market
(4) money market
(7) The Johannesburg Securities Exchange is an example of a
(1) primary market only.
(2) secondary market only.
(3) primary and secondary market.
(4) money market.
(8) The tax deductibility of expenses their after-tax cost.
(1) increases
(2) reduces
(3) has no efect on
(4) has an undermined efect on
(9) A corporate bond
(1) will always be awarded an AAA rating.
(2) represents the long-term funds provided by the enterprises shareholders.
(3) will always be issued as a secured bond.
(4) is a debt instrument indicating the amount borrowed and how the amount will
be repaid under clearly defned terms.
(10) Which one of the following statements about the diference between ordinary shares
and preference shares is correct?
(1) The claims of preference shareholders must be satisfed before the board of direc-
tors declares any dividends payable to ordinary shareholders.
(2) Ordinary shareholders are given preference over preference shareholders in the
liquidation of assets as a result of bankruptcy.
(3) Preference shares are super-voting shares whilst ordinary shares are non-voting
shares.
(4) Preference shareholders are sometimes referred to as residual owners.
6
2FEEDBACK ABOUT THE SELF-ASSESSMENT
Question 1 Answer 1
Question 2 Answer 2
Question 3 Answer 3
Question 4 Answer 3
Question 5 Answer 2
Question 6 Answer 4
Question 7 Answer 2
Question 8 Answer 2
Question 9 Answer 4
Question 10 Answer 1
ACTIVITY
Use the Internet to study about the following concepts within the South African context
x
financial markets and operation (the Johannesburg Stock Exchange)
x
business forms
Complete the scheduled online tests/quizzes on chapter 1 on the MyFinanceLab website.
KEY CONCEPTS
y
The scope of financial management
y
Financing, investment and dividend decisions
y
The agency problem
y
Business forms
y
Primary activities of a financial manager
y
Goal of the enterprise
y
Corporate governance
y
Economic value added (EVA)
y
Ethics
y
Primary market
y
Secondary market
y
Capital market
y
Debt capital
y
Bond
y
Stock
y
Public offering
y
Capital gains
y
London interbank offered rate (LIBOR)
y
Market interest rates
7 FIN2601
y
Nominal or quoted interest rate
SUMMARY
This study unit provided an overview of nancial management and its role in maximising
the value of an enterprises ordinary share. The study unit looked at the role of the nance
manager. It also examined the interlinkage between nance and other key line functions
in an organisation. This study unit also discussed agency relationships; conicts that may
arise between shareholders and managers and between shareholders and the provid-
ers of debt. The study unit also examined the operating environment of the enterprise.
CHECKLIST
Did you read the chapter in full in order to gain an overall impres-
sion of the content?
Have you completed the activity?
Have you completed the assessment?
Have you studied the contents of this chapter?
Have you achieved the learning outcome?
Would you be able to meet the stated assessment criteria?
Have you discussed any challenges with this study unit with fellow
students (personally or via the discussion forum at myUnisa), your
tutor or lecturer?
Did you establish whether any additional resources are available
from myUnisa?
8
72
9 FIN2601
Study unit 2
FINANCIAL STATEMENTS AND ANALYSIS
TUTORIAL MATTER
Study chapter 2 in your prescribed book.
CONTENTS
73Tutorial matter
74Learning outcomes
75Overview
76Self-assessment
77Activity
78Key concepts
79Summary
80Checklist
LEARNING OUTCOMES
After working through this study unit you should
y
be able to review the contents of key financial statements
y
understand who uses financial ratios and why
y
be able to discuss the relationship between debt and financial leverage
y
be able to use ratios to analyse an enterprises profitability and its market value
y
be able to use a summary of financial ratios and the DuPont system of analysis to
perform a complete ratio analysis
2ASSESSMENT CRITERIA
Students should be able to construct the various forms of the fnancial statements. They
should be able to interpret the fnancial performance of an enterprise by merely inspect-
ing the fnancial statements as well as through the use of ratios. Students should be able
to benchmark fnancial performance and draw comparisons between companies in the
same industries. They should understand the limitations of ratio analysis.
81
10
OVERVIEW
This study unit examines four key components of the shareholders report: the state-
ment of comprehensive income, statement of nancial position, statement of retained
earnings, and statement of cash ows. On the statement of comprehensive income and
statement of nancial position, the major accounts/balances are reviewed for the stu-
dent. The rules for consolidating a companys foreign and domestic nancial state-
ments (FASB No. 52) are described. Following the nancial statement coverage the
study unit covers the evaluation of nancial statements using the technique of ra-
tio analysis. Prospective shareholders and creditors use ratio analysis and the enter-
prises own management to measure the enterprises operating and nancial health.
Three types of comparative analysis are dened: cross-sectional analysis, time series
analysis and combined analysis. The ratios are divided into ve basic categories: liquid-
ity, activity, debt, protability and market. Each ratio is dened and calculated using the
nancial statements of the Bartlett Company. A brief explanation of the implications of
deviation from industry standard ratios is oered, with a complete (cross-sectional and time
series) ratio analysis of Bartlett Company ending the chapter. The DuPont system of analysis
is also integrated into the example. The importance of understanding nancial statements
is highlighted through discussions of how such knowledge will help the student be a
more ecient business manager and more eectively make personal nancial decisions.
3SELF-ASSESSMENT
(1) The notes to fnancial performance are an important part of the shareholders report
because they
(1) are the primary communication from management to the enterprises owners.
(2) provide information on the accounting policies, procedures, calculations and
transactions underlying entries in the fnancial statements.
(3) indicate whether the auditors have certifed the statements as a fair representa-
tion of the fnancial afairs of the enterprise.
(4) explain to what extent the generally accepted accounting principles (GAAP)
were adhered to.
(2) Which of the following statements are correct?
(a) The fnancial statements of an enterprise consist of the income statement, the
balance sheet, the statement of retained earnings and the cash budget.
(b) The income statement measures the proftability of the enterprise.
(c) The balance statement measures only the value of the assets of the enterprise.
(1) a
(2) b
(3) a, b
(4) b, c
(3) An enterprise has fxed assets worth R900 000 and current assets worth R180 000.
The enterprise owes R440 000 on a mortgage bond and money owed to creditors
amount to R10 000. Owners equity equals
(1) R630 000.
(2) R640 000.
(3) R1 170 000.
(4) R1 180 000.
11 FIN2601
(4) Siyaya Corporation had sales worth R20 000 for the year. The inventory at the
beginning of the year was worth R10 000, and at the end of the year it was worth
R14 000. The enterprise purchased goods worth R15 000 during the year. The gross
proft equals
(1) R9 000.
(2) R11 000.
(3) R14 000.
(4) R15 000.
(5) The income statement consists of
(1) assets, liabilities and shareholders equity.
(2) sales, cost of goods sold and operating expenses.
(3) cash fow from operating, fnancing and investment activities.
(4) net income earned, cash dividends paid and change in retained earnings.
(6) The of a business enterprise is measured by its ability to satisfy its short-term
obligations as they become due.
(1) activity
(2) liquidity
(3) debt
(4) proftability
(7) The three summary ratios basic to the DuPont system of analysis are
(1) net proft margin, total asset turnover and return on investment.
(2) net proft margin, total asset turnover and return on equity.
(3) net proft margin, total asset turnover and equity multiplier.
(4) net proft margin, fnancial leverage multiplier and return on equity.
(8) An enterprise with total asset turnover lower than the industry standard may have
(1) excessive debt.
(2) excessive cost of goods sold.
(3) insufcient sales.
(4) insufcient fxed assets.
(9) An enterprise with sales of R 1 000 000, net proft after taxes of R30 000, total assets
of R1 500 000 and total liabilities of R750 000 has a return on equity of
(1) 20 per cent.
(2) 15 per cent.
(3) 3 per cent.
(4) 4 per cent.
(10) An increase in fnancial leverage will result in in the return on equity.
(1) an increase
(2) a decrease
(3) no change
(4) an undetermined change
82
12
3FEEDBACK ABOUT THE SELF-ASSESSMENT
Question 1 Answer 2
Question 2 Answer 2
Question 3 Answer 1
Question 4 Answer 1
Question 5 Answer 2
Question 6 Answer 2
Question 7 Answer 3
Question 8 Answer 3
Question 9 Answer 4
Question 10 Answer 1
ACTIVITY
y
Collect at least five different set of company financial statements from newspapers
or company reports. These must be from the same industry.
y
Analyse the way they are constructed.
y
Perform ratio analysis and interpret the results.
y
Complete the scheduled online tests/quizzes on chapter 2 on the MyFinanceLab
website.
KEY CONCEPTS
y
Shareholders report
y
Income statement
y
Balance sheet
y
Current assets
y
Retained earnings
y
Ordinary income
y
Current liabilities
y
Statement of cash flows
y
DuPont system of analysis
y
Modified DuPont formula
y
Leverage
y
Return on equity (ROE)
y
Price-earnings ratio (P/E)
y
Financial leverage multiplier (FLM)
y
Cross-sectional analysis
y
Time series analysis
y
Net working capital
y
Quick ratio
13 FIN2601
y
Total asset turnover
y
Common size income statement
SUMMARY
This study unit examined the key components of the shareholders report. This was fol-
lowed by the use of ratios to interpret the nancial statements. The student was also
introduced to how to draw a comparison in nancial performance whether longitudinal,
time series or cross-sectional.
CHECKLIST
Did you read the chapter in full in order to gain an overall impres-
sion of the content?
Have you completed the activity?
Have you completed the assessment?
Have you studied the contents of this chapter?
Have you achieved the learning outcome?
Would you be able to meet the stated assessment criteria?
Have you discussed any challenges with this study unit with fellow
students (personally or via the discussion forum at myUnisa), your
tutor or lecturer?
Did you establish whether any additional resources are available
from myUnisa?
14
83
15 FIN2601
TOPIC 2
IMPORTANT FINANCIAL CONCEPTS
4AIMS
The aims of this topic are to
(1) explain the two fundamental principles of fnancial management: the time value of
money and risk versus return
(2) apply the above principles in valuation of bonds and shares
INTRODUCTION
84Topic 2 is divided into the following four study units (SUs):
85SU 3: Time value of money
86SU 4: Risk and return
87SU 5: Interest rates and bond valuation
88SU 6: Stock valuation
89Since each study unit has its own particular objective, we shall now deal with each of
them separately.
16
90
17 FIN2601
Study unit 3
TIME VALUE OF MONEY
TUTORIAL MATTER
Study chapter 4 in your prescribed book.
CONTENTS
91Tutorial matter
92Learning outcomes
93Overview
94Self-assessment
95Activity
96Key concepts
97Summary
98Checklist
LEARNING OUTCOMES
After working through this study unit you should
y
be able to discuss the role of time value in finance and use computational tools in
analysis
y
understand the concepts of future value and present value
y
be able to calculate the future value of both an ordinary annuity and an annuity
due, the present value of a perpetuity and the future value of a mixed-stream cash
flow
y
understand the effect that compounding interest more frequently than annually
has on future value and on the effective annual rate of interest
y
be able to draw up a loan amortisation and determine an implied growth rate
4ASSESSMENT CRITERIA
Students will be expected to use discuss the concept of time value. They will be expected
to apply the theory of compound interest and use computational tools in analysis. Fur-
ther they will be expected to solve routine problems in the time value of money involving
present value and future value.
18
OVERVIEW
This study unit introduces an important nancial concept: the time value of money. The
PV and FV of a sum, as well as the present and future values of an annuity, are explained.
Special applications of the concepts include intra-year compounding, mixed cash ow
streams, mixed cash ows with an embedded annuity, perpetuities, deposits to accumu-
late a future sum, as well as loan repayment. Numerous business and personal nancial
applications are used as examples. The study unit drives home the need to understand
time value of money at the professional level because funding for new assets and pro-
grammes must be justied using these techniques. Decisions in a students personal life
should also be acceptable on the basis of applying time-value-of-money techniques to
anticipated cash ows.
The timing of cash ows has important economic consequences because enterprises and
individuals have many opportunities to earn positive rates of return on invested funds. A
time line depicts the investment cash ows (both positive and negative) on a horizontal
line with time zero at the left end and future periods shown from left to right.
Future value (FV), the value of a present amount at a future date, is calculated by apply-
ing compound interest over a specic time period. Present value (PV) represents the
rand value today of a future amount, or the amount you would invest today of a future
amount, or the amount you would invest today at a given interest rate for a specied
time period to equal the future amount. Financial managers prefer present value to future
value because they typically make decisions at time zero, before the start of the project.
Financial tables present future value and present value interest factors arranged in columns
and rows, with a row for each period (years) and a column for each interest rate shown
in the table. The interest factor for k% in year n is found at the intersection of row n and
column k. Time value calculations can also be performed on a nancial calculator. Use of
a calculator greatly enhances the mathematical process in terms of speed and accuracy.
It is important that the user understands the conceptual aspects of the solution model
before using a calculator. The recommended calculator for this module is the HP10BII.
5SELF-ASSESSMENT
(1) R10 000 is invested in a savings account at 20% per annum compound interest for
ten years. What is the end value of the investment?
(1) R61 740
(2) R61 920
(3) R62 290
(4) R62 470
(2) You have invested R 3 600 per year (at the end of each year) for ten successive years in
a savings account at 15% per annum compound interest. Which one of the following
is closest to the end value in the savings account?
(1) R73 094,40
(2) R74 390,60
(3) R83 094,40
(4) R93 940,60
19 FIN2601
(3) R10 000 is invested in a savings account for ten years at 20% compound interest, but
the interest is calculated semi-annually. What is the end value of the investment?
(1) R27 670
(2) R47 860
(3) R67 270
(4) R87 410
(4) You will receive an amount of R1 700 eight (8) years from now. However, if you could
receive the amount right now and invest it, you would be able to earn 8% interest
per annum on the amount. What would the amount be worth if you could receive
it now instead of waiting eight years?
(1) R819
(2) R918
(3) R1 564
(4) R1 700
(5) Which one of the following represents most closely the present value of R25 000
received annually for ten successive years using a discount of 17%?
(1) R29 250
(2) R207 500
(3) R116 475
(4) R292 500
(6) What amount should be invested annually (at the end of each year) for fve successive
years at 12% per annum compound interest in order to yield approximately R25 000?
(1) R3 935,15
(2) R4 199,72
(3) R4 167,58
(4) R4 400,00
(7) What is the interest or growth rate of the following stream of cash fows?
2010 R1 517
2009 R1 312
2008 R1 210
2007 R1 080
(1) 6%
(2) 8%
(3) 10%
(4) 12%
5FEEDBACK ABOUT THE SELF-ASSESSMENT
Question 1 Answer 2
Using equation Using tables
FV
n
= (1 + i)
n
FV
n
= PV FVIF
i,n

= R10 000 (1 + 0,20)
10
= R10 000 6,192
= R10 000 6,192 = R61 920
=R61920
20
Calculator solution
Input Function
10 000 PV
10 n
20 i
FV
Solution is R61 917,36
Question 2 Answer 1
Using tables Calculator solution
FVA
n
= PMT (FVIFA
i,n
) Input Function
= R3 600 20,304 3 600 PMT
= R73 094,40 10 n
15 i
FV
Solution is R73 093, 39
Question 3 Answer 3
Using equation Calculator solution
FV
n
= PV (1 + i/m )
mn
Input Function

= R10 000 (1 +0,2/2)
102
10 000 PV
= R10 000 (1.1)
20
10 2 = 20 n
= R10 000 6,727 20/2 = 10 i
= R67 270 FV
Solution is R67 250
Question 4 Answer 2
Using tables Calculator solution
PV = FV
n
(PVIFA
i,n
) Input Function
= R1 700 0,540 1 700 FV
= R918 8 n
8 i
PV
Solution is R918,46
Question 5 Answer 3
Using tables Calculator solution
PVA = PMT (PVIF
i,n
) Input Function
= R25 000 4,569 25 000 PMT
= R116 475 10 n
17 i
PV
Solution is R116 465, 09
Question 6 Answer 1
Using tables Calculator solution
PMT = FVA Input Function
(FVIFA
i,n
) 25 000 FV
= R25 000 5 n
6,353 12 i
= R3 935,15 PMT
Solution is R3 935,24
21 FIN2601
Question 7 Answer 4
Using tables Calculator solution
PV = R1080 Input Function
FV R1517 +/- 1080 PV
= 6,711 1517 FV
PVIF
k,3
= 12% 3 n
I
Solution is 11,99
ACTIVITY
(1) Familiarise yourself with the HP10BII nancial calculator by performing the future
value and present value calculations.
(2) Listen to the podcast on the HP10BII calculator on the subject website.
(3) Complete the scheduled online tests and quizzes on chapter 4 on the MyFinanceLab
website.
KEY CONCEPTS
y
Time line
y
Principal
y
Nominal annual rate
y
Compound interest
y
Annuity
y
Annuity due
y
Future value
y
Effective annual rate
y
Ordinary annuity
y
Present value
y
Discounting cash flows
y
Perpetuity
y
Loan amortisation
SUMMARY
This study unit covered the various aspects of the time value of money. It introduced the
tools of computational analysis that would be used in the latter study units.
99
22
CHECKLIST
Did you read the chapter in full in order to gain an overall impres-
sion of the content?
Have you completed the activity?
Have you completed the assessment?
Have you studied the contents of this chapter?
Have you achieved the learning outcome?
Would you be able to meet the stated assessment criteria?
Have you discussed any challenges with this study unit with fellow
students (personally or via the discussion forum at myUnisa), your
tutor or lecturer?
Did you establish whether any additional resources are available
from myUnisa?
23 FIN2601
Study unit 4
RISK AND RETURN
TUTORIAL MATTER
Study chapter 5 in your prescribed book.
CONTENTS
100Tutorial matter
101Learning outcomes
102Overview
103Self-assessment
104Activity
105Key concepts
106Summary
107Checklist
LEARNING OUTCOMES
After working through this study unit you should be able to
y
define risk
y
define and calculate return
y
distinguish between risk preference behaviours
y
assess risk by means of sensitivity analysis and probability distributions
y
calculate the standard deviation (s) and coefficient of variation
y
calculate the return on a portfolio
y
calculate the standard deviation (s) of a portfolios returns
y
describe correlation and diversification, and their influence on the risk and return
of a portfolio
y
describe the link between risk and return according to the capital asset pricing
model (CAPM)
y
calculate and interpret beta ()
y
calculate the required rate of return of an asset using the capital asset pricing model
(CAPM)
6ASSESSMENT CRITERIA
Financial management is central to the operations of any business entity. Students will
be expected to discuss the activities of a fnance manager. They will also be expected to
24
discuss, in detail, agency relationships; conficts that may arise between shareholders
and managers and between shareholders and the providers of debt.
OVERVIEW
This study unit focuses on the fundamentals of the risk and return relationship of as-
sets and their valuation. For the single asset held in isolation, risk is measured with the
probability distribution and its associated statistics: the mean, the standard deviation,
and the coecient of variation. The concept of diversication is examined by measur-
ing the risk of a portfolio of assets that are perfectly positively correlated, perfectly
negatively correlated, and those that are uncorrelated. The capital asset pricing model
(CAPM) is then presented as a valuation tool for securities and as a general explana-
tion of the risk-return trade-o involved in all types of nancial transactions. This study
unit highlights the importance of understanding the relationship of risk and return
when making professional and personal decisions.
RISK
Risk is dened as the chance of nancial loss, as measured by the variability of expected
returns associated with a given asset. A decision maker should evaluate an investment
by measuring the chance of loss (or risk) and comparing the expected risk with the ex-
pected return. Some assets are considered to be risk free, the most common example
being South African government bonds.
RETURN
The return on an investment (total gain or loss) is the change in value plus any cash dis-
tributions over a dened time period. It is expressed as a percentage of the investment
over the period. Make sure that you understand the formula for the return for any asset.
Realised return requires the asset to be purchased and sold during the time periods
in which the return is measured. Unrealised return is the return that could have been
realised if the asset had been purchased and sold during the time period in which the
return was measured.
RISK PREFERENCE BEHAVIOURS
A risk-averse nancial manager requires an increase in return for a given increase in risk.
A risk-indierent manager requires no change in return for an increase in risk. A risk-
seeking manager accepts a decrease in return for a given increase in risk. Most nancial
managers are risk-averse.
SENSITIVITY ANALYSIS AND PROBABILITY DISTRIBUTIONS
Sensitivity analysis evaluates asset risk by using more than one possible set of returns
to obtain a sense of the variability of outcomes. The range is found by subtracting the
pessimistic outcome from the optimistic outcome. The larger the range, the greater the
variability of risk associated with the asset.
The decision maker can obtain an estimate of project risk by viewing a plot of the prob-
ability distribution that relates probabilities to expected returns and shows the extent of
25 FIN2601
distribution of returns. The more dispersed the distribution is, the greater the variability
or risk associated with the return stream.
A bar chart is a probability distribution for a small number of outcomes, while a continu-
ous probability distribution considers all possible outcomes over the relevant range.
STANDARD DEVIATION AND COEFFICIENT OF VARIATION
The standard deviation of a distribution of asset returns is an absolute measure of dis-
persion of risk about the mean or expected value. A higher standard deviation indicates
a greater project risk. In case of a larger standard deviation, the distribution is more
dispersed and the outcomes have a higher variability resulting in higher risk. The coef-
cient of variation is another indicator of asset risk, and measures relative dispersion. It
is calculated by dividing the standard deviation by the expected value. The coecient of
variation may be a better basis than the standard deviation for comparing risk of assets
with diering expected returns.
ANALYSING RISK AND RETURN WITHIN A PORTFOLIO
Assets should be evaluated in a portfolio context because the risk of the entire portfolio
is a function of the risk of the individual assets. The risk of an asset cannot be viewed
independently but should rather be viewed in the light of its overall eect on the port-
folios risk. As long as we assume the conditions underlying the CAPM, the portfolio rules
apply to investors and not to enterprises.
An ecient portfolio is one that maximises return for a given risk level or minimises the
risk for a given level of return. The return of a portfolio is the weighted average of returns
on the individual component assets.
The standard deviation of a portfolio is not the weighted average of component standard
deviations: the risk of the portfolio as measured by the standard deviation will be smaller.
It is calculated by applying the standard deviation formula to the portfolio assets.
The correlation between asset returns is important when evaluating the eect of a new
asset on the portfolios overall risk. Returns on dierent assets moving in the same direction
are positively correlated, while those moving in opposite directions are negatively cor-
related. Assets with a high positive correlation increase the variability of portfolio returns;
assets with a high negative correlation reduce the variability of portfolio returns. When
negatively correlated assets are brought together through diversication, the variability
of the expected return from the resulting combination may be less than the variability
or risk of the individual assets. When one asset has high returns, the others returns are
low (and vice versa). Therefore the result of diversication is to reduce risk by providing
a pattern of stable returns.
Diversication of risk in the asset selection process allows the investor to reduce
overall risk by combining negatively correlated assets so that the risk of the portfolio
is less than the risk of the individual assets in it. Even if assets are not negatively
correlated, the lower the positive correlated between them, the lower the result-
ing risk.
THE CAPITAL ASSET PRICING MODEL (CAPM) AND BETA
The total risk of a security is the combination of no diversiable risk and diversiable risk.
Diversiable risk refers to the portion of an assets risk attributable to enterprise-specic,
26
random events( strikes, litigation, loss of key contracts, etc) that can be eliminated by
diversication. Non-diversiable risk is attributable to market factors aecting all enter-
prises (war, ination, political events, etc). Some people argue that non-diversiable risk
is the only relevant risk because diversiable risk can be eliminated by correlated assets.
Beta measures non-diversiable risk. It is an index of the degree of movement of an assets
return in response to a change in the market return. The beta coecient for an asset can
be found by plotting the assets historical returns relative to the returns for the market.
By using statistical techniques, the characteristic line is then matched to data points. The
slope of this line is beta. Beta coecients for actively traded shares are published in the
Value Line Investment Survey and brokerage reports. The beta of a portfolio is calculated
by nding the weighted average of the betas of the individual component assets.
The equation for the capital asset pricing model is:
K
j
= R
f
+ [b
j
(k
m
R
f
)]
Where:
K
j
= the required (or expected) return on asset
j
R
f
= the rate of return required on a risk-free security
B
j
= the beta coecient or index of non-diversiable (relevant) risk for asset
j
K
m
= the required return on the market portfolio of assets (the market return)
PRACTICAL APPLICATIONS OF RISK AND RETURN CONCEPTS
Risk and return concepts come into consideration when dealing with related issues such
as the leverage and capital structure of the enterprise. Risk is perceived as nancial risk
and business risk. The concept of leverage (both nancial and operating) is used to de-
scribe these types of risk. In ascertaining the optimal capital structure of the enterprise,
the concepts of standard deviation, coecient of variation and probabilities are crucial
in determining expected values and in measuring risk.
7SELF-ASSESSMENT
(1) Risk may be defned as the
(1) chance of fnancial loss.
(2) variability of returns associated with a given asset.
(3) uncertainty concerning a potential loss.
(4) All of the above.
(2) A tank container (purchased a year ago for R120 000) currently has a market value
of R145 000. During the year it generated R4 800 in after-tax cash receipts. What is
the containers rate of return?
(1) 4,0%
(2) 13,9%
(3) 16,8%
(4) 24,8%
(3) If a fnancial managers required rate of return increases for an increase in risk, then
he or she is a
(1) risk-taking manager.
(2) risk-indiferent manager.
(3) risk-averse manager.
(4) risk-control manager.
27 FIN2601
(4) What is the expected rate of return if the following probabilities and associated rates
of return exist?
P
r
Rate of return
0,25 20%
0,50 15%
0,25 10%
(1) 6,00%
(2) 11,25%
(3) 13,50%
(4) 15,00%
(5) What is the standard deviation(s) for the returns of an asset as depicted below?
Pr Rate of return
0,40 35%
0,30 10%
0,30 -20%
(1) 21,66%
(2) 22,78%
(3) 25,00%
(4) 34,20%
(6) Nsukuzonke Ltd has invested in an asset. The expected return (k) is 18%. Risk estimates
indicate that the standard deviation is 21%. The coefcient of variation, (CV) of the
asset is closest to
(1) 0,85.
(2) 1,17.
(3) 1,50.
(4) 3,00.
(7) Investec is considering investing in Spur shares. The risk-free rate of return (R
f
) is 14%.
The beta of the share is 0.8% and the market rate of return (k
m
) is 20%. The required
rate of return (k
j
) is closest to
(1) 14,0%.
(2) 15,2%.
(3) 16,0%.
(4) 18,8%.
(8) The returns of Ikhwezi Corporations shares have a standard deviation () of 1.8%
and a coefcient of variation (CV) of 0.09. The risk-free rate of return (R
f
) is 12%. The
beta of the share is 1.6% and the market rate of return (k
m
) is 17%. The required rate
of return (k
j
) is closest to .
(1) 13,5%.
(2) 15,2%.
(3) 19,2%.
(4) 20,0%.
108
28
6FEEDBACK ABOUT THE SELF-ASSESSMENT
Question 1 Answer 4
Question 2 Answer 4
Question 3 Answer 3
Question 4 Answer 4
1
n
i
i
k k

P
r
= (0.20 0.25) + (0.15 0.50) + (0.10 0.25)
= 0.15
= 15%
Question 5 Answer 2
1
( ) Pr
n
k i
i
X X V

1
n
i
i
k k

P
r
= (0.35 0.40) + (0.10 0.30) + (0.20 0.30)
= 0.14 + 0.03 0.06
= 0.11
= 11%

k
= [ (0.350.11)
2
0.4 + (0.01 0.11)
2
0.30 + (0.20 -0.11)
2
0.30]
= 0,0519
= 0.2278
= 22, 78%
Question 6 Answer 2

CV=
k
/ k
= 0.21/ 0.18
= 1.1666
= 1.17
Question 7 Answer 4
Question 8 Answer 4
ACTIVITY
(1) Investigate the returns of your bank over the last three (3) years.
29 FIN2601
(2) After working through this study unit, complete the scheduled online test and quiz
on the MyFinanceLab website.
KEY CONCEPTS
y
Portfolio
y
Risk
y
Return
y
Risk-averse
y
Sensitivity analysis
y
Probability
y
Risk-seeking
y
Range
y
Standard deviation
y
Normal probability distribution
y
Efficient portfolio
y
Uncorrelated
y
Capital asset pricing model (CAPM)
y
Coefficient of variation
y
Beta coefficient ()
y
Security market line (SML)
y
Non-diversifiable risk
y
Market return
y
Efficient market
SUMMARY
This study unit covered the concept of risk and return. This unit utilised the concepts of
statistics to explain nancial measures such as risk and return. Concepts such as standard
deviation, risk, probability and coecient of variation were covered. It is important for
nancial managers to analyse investment and nancing strategies within a risk return
framework.
CHECKLIST
Did you read the chapter in full in order to gain an overall impres-
sion of the content?
Have you completed the activity?
Have you completed the assessment?
Have you studied the contents of this chapter?
Have you achieved the learning outcome?
30
Would you be able to meet the stated assessment criteria?
Have you discussed any challenges with this study unit with fellow
students (personally or via the discussion forum at myUnisa), your
tutor or lecturer?
Did you establish whether any additional resources are available
from myUnisa?
31 FIN2601
Study unit 5
INTEREST RATES AND BOND VALUATION
TUTORIAL MATTER
Study chapter 6 in your prescribed book.
CONTENTS
109Tutorial matter
110Learning outcomes
111Overview
112Self-assessment
113Activity
114Key concepts
115Summary
116Checklist
LEARNING OUTCOMES
After working through this study unit you should
y
be able to describe interest rate fundamentals, the term structure of interest rates
and risk premiums
y
understand the key inputs and the basic model used in the valuation process
y
be able to apply the basic valuation model to bonds and describe the impact of
required return and time-to-maturity on bond values
y
be able to explain yield-to-maturity (YTM), its calculation and the procedure used
to value bonds that pay interest semi-annually
8ASSESSMENT CRITERIA
Students will be expected to discuss the main theories of the term structure. They will also
be expected to distinguish between the nominal rate and real rate of interest. It will also
be expected of students to familiarise themselves with the bond market, specifcally, the
type of bonds and the features of these bonds. Further they will be expected to apply the
basic valuation model in the determination of the bond price or the yield of the bond.
117
32
OVERVIEW
This study unit begins with a thorough discussion of interest rates and yield curves, and
their relationship to required returns. Features of the major types of bond issues are pre-
sented along with their legal issues, risk characteristics and indenture convents. The study
unit then introduces students to the important concept of valuation and demonstrates
the impact of cash ows, timing and risk on value. It explains models for valuing bonds
and the calculation of yield-to-maturity using either the trial-and-error approach or the
approximate yield formula. Students learn how interest rates may aect their ability to
borrow and expand business operations or assets under personal control.
VALUATION
Valuation is the process that links risk and return in order to determine the worth of as-
sets. A nancial manager should understand the valuation process in order to judge the
value of benets received from bonds.
KEY INPUTS IN THE VALUATION PROCESS
The three key inputs in the valuation process are as follows
1. cash ows the cash generated from ownership of the asset
2. timing the time period(s) in which cash ows are received
3. required return the interest rate used to discount the future cash ows to a
present value (the selection of the required return allows the level of risk to be ad
justed: the higher the risk, the higher the required return)
THE BASIC BOND VALUATION FORMULA
0
1
1 1
| | | |
(1 ) (1 )
n
n n
i
a a
B I M
k k

u u

where:
B
0
= value of bond that pays annual interest
I = interest or coupon payment
n = years to maturity
m = par value / face value
k
d
= required return on bond

In order to nd the value of bonds paying interest semi-annually, the basic bond valuation
equation should be adjusted to account for the more frequent payment of interest as follows:
y
The annual interest should be converted to semi-annual interest by dividing it by two.
y
The number of years to maturity should be multiplied by two.
y
The required return should be converted to a semi-annual rate by dividing it by two.

2
0
2
1
1 1
| | |
2 (1 / 2) (1 / 2)
n
n n
i
a a
I
B M
k k

u u

33 FIN2601
A bond sells at a discount when the required return exceeds the coupon rate. It sells at
a premium when the required return is less than the coupon rate. A bond sells at par
when the required rate of return equals the coupon rate.
YIELD-TO-MATURITY (YTM)
The yield-to-maturity (YTM) on a bond is the rate investors earn if they buy the bond at a
specic price and hold it until maturity. The trial-and-error approach to calculating YTM
requires nding the value of the bond at various rates to determine the rate causing the
calculated bond value equal its current value. The procedure to calculate YTM is analogous
to that of calculating the internal rate of return (IRR). Many calculators are programmed
to calculate the internal rate of return (IRR). You can also use this feature to calculate the
YTM, since the YTM and IRR are determined in the same way.
9SELF-ASSESSMENT
(1) In the valuation process, the is used to incorporate risk in the analysis.
(1) standard deviation ()
(2) coefcient of variation (CV)
(3) discount rate
(4) interest rate
(2) Muntu Zondo acquired an asset that is expected to generate cash fows of R2 200, R0,
R4 400 and R11 00 at the end of years one, two, three and four respectively. Muntus
required rate of return is 18%. The value of the asset equals
(1) R10 219,00.
(2) R14 432,00.
(3) R17 600,00.
(4) R31 154,20.
(3) The theory suggesting that for any given issuer, long-term interest rates tend to be
higher than short-term rates is called
(1) the expectation hypothesis.
(2) the liquidity preference theory.
(3) the market segmentation theory.
(4) None of the above.
(4) An enterprise has an issue of R1 000 par value bonds with a nine per cent stated
interest rate outstanding. The issue pays interest annually and has 20 years remain-
ing to its maturity date. If bonds of similar risk are currently earning 11 per cent, the
enterprises bond will sell for today.
(1) R1 000
(2) R716,67
(3) R840,67
(4) R1 123,33
(5) What is the yield-to-maturity, to the nearest per cent, for a bond whose current price
is R908, has a coupon rate of 11%, has R1 000 par value, on which interest is paid
annually and which has eight years to maturity?
(1) 11 per cent
34
(2) 2 12 per cent
(3) 3 13 per cent
(4) 4 14 per cent
(6) ABC Corp issued bonds bearing a coupon rate of 12 per cent, pay coupons semi-
annually, have three years remaining to maturity and are currently priced at R940
per bond. What is the yield-to-maturity (YTM)?
(1) 12,00%
(2) 13,99%
(3) 14,54%
(4) 15,25%
(7) Renaissance Investments has a required rate of return of 15%. It is considering invest-
ing in Orange Cell debentures, which will be issued at a par value of R1 000 with a
coupon interest rate of 12% (paid annually) and a maturity period of ten years. The
value of the debentures is approximately
(1) R247,00.
(2) R602,28.
(3) R849,28.
(4) R1 000,00.
7FEEDBACK ABOUT THE SELF-ASSESSMENT
Question 1 Answer 3
Question 2 Answer 3
Question 3 Answer 2
Question 4 Answer 3
Question 5 Answer 3
Question 6 Answer 3
Question 7 Answer 3
ACTIVITY
y
Use the Internet to study about the concepts bond market and the bond issuance
within the South African context.
y
Complete the scheduled online tests and quiz on chapter 6 on the MyFinanceLab
website.
118
35 FIN2601
KEY CONCEPTS
y
Valuation
y
Floatation
y
Discount
y
Premium
y
Real rate
y
Nominal rate
y
Interest rate risk
y
Yield-to-maturity (YTM)
y
Par value
y
Face value
y
Coupon
y
Market segmentation
y
Expectations
SUMMARY
This study unit covered the concepts of interest rates and valuation of bonds. Bonds rep-
resent debt capital and hence are a critical component of the nancing of an enterprise.
CHECKLIST
Did you read the chapter in full in order to gain an overall impres-
sion of the content?
Have you completed the activity?
Have you completed the assessment?
Have you studied the contents of this chapter?
Have you achieved the learning outcome?
Would you be able to meet the stated assessment criteria?
Have you discussed any challenges with this study unit with fellow
students (personally or via the discussion forum at myUnisa), your
tutor or lecturer?
Did you establish whether any additional resources are available
from myUnisa?
36
119
37 FIN2601
Study unit 6
STOCK VALUATION
TUTORIAL MATTER
Study chapter 7 in your prescribed book.
CONTENTS
120Tutorial matter
121Learning outcomes
122Overview
123Self-assessment
124Activity
125Key concepts
126Summary
127Checklist
LEARNING OUTCOMES
After working through this study unit you should
y
be able to differentiate between debt and equity capital
y
understand the concept of market efficiency and basic ordinary share valuation
using zero growth, constant growth and variable growth models
y
be able to discuss the free cash flow valuation model and the book value, liquidation
value and price/earnings (P/E) multiple approaches
y
be able to explain the relationships among financial decisions, return, risk and the
enterprises value.
10ASSESSMENT CRITERIA
Students will be expected to discuss the process of listing shares and diferentiate be-
tween preference and ordinary equity. Further they will be expected to value shares of
enterprises that are at various stages of growth.
38
OVERVIEW
This study unit continues on the valuation process introduced in study unit 5 for bonds.
Models for valuing preference and ordinary share are presented. For ordinary shares, the
zero growth, constant growth, and variable growth models are examined. The relation-
ship between share valuation and ecient markets is presented. The role of venture
capitalists and investment bankers is also discussed. The free cash ow model is explained
and compared with the dividend discount models. Other approaches to ordinary share
valuation and their shortcomings are explained.
The chapter ends with a discussion of the interrelationship between nancial decisions,
expected return, risk, and an enterprises value. Share valuation from the perspective
of the ones professional life is contrasted with share valuation from a personal perspective.
EFFICIENT MARKET HYPOTHESIS
In an ecient market, investors would buy an asset if the expected return exceeds the
current return thereby increasing its price (market value) and decreasing the expected
return until expected and required returns are equal.
According to the ecient market hypothesis (EMH)
y
share prices are in equilibrium (fairly priced with expected returns equal to required
returns)
y
share prices fully reflect all the available public information and will react quickly
to new information
y
investors should therefore not waste time searching for mispriced (overvalued or
undervalued) shares
The ecient market hypothesis is generally accepted as being reasonable for shares
traded on major exchanges (this is supported by research on the subject). The zero growth
model of ordinary share valuation assumes a constant, non-growing dividend stream.
The share is valued as perpetuity and discounted at a rate k
s
.
ORDINARY SHARE VALUATION
The constant growth model of ordinary share valuation (also called the Gordon model)
assumes that dividends will grow at a constant rate (g). The share is valued as the present
value of the constantly growing cash ow stream.
The variable growth model of ordinary share valuation assumes that dividends grow at
a variable rate. The share with a single shift in the growth rate is valued as the present
value of the dividend stream during the initial growth phase plus the present value of
the share price at the end of the initial growth phase.
Book value is the value of the share in the event that all assets are liquidated for their
book value and the proceeds remaining after paying all liabilities are divided among the
ordinary shareholders.
Liquidation value is the actual amount each ordinary shareholder would expect to receive
if the enterprises assets are sold, creditors and preference shareholders are paid, and any
remaining money is divided among the ordinary shareholders. Price-earnings multiples
are another way to estimate ordinary share value. The share value is estimated by multi-
plying expected earnings per share by the average price/earnings ratio for the industry.
39 FIN2601
Both the book value approach and liquidation value approach ignore the earning power
of an enterprises assets and lack a relationship to the enterprises value in the marketplace.
The price/earnings multiples approach is considered the best approach to valuation, since
it considers expected earnings. The P/E ratio also has the strongest theoretical roots.
One divided by the P/E ratio can be viewed as the rate at which investors discount the
enterprises earnings. If the projected earnings per share (EPS) are assumed to be earned
indenitely, the P/E multiple approach can be regarded as a method of nding the pres-
ent value of a perpetuity of projected EPS at a rate equal to the P/E ratio.
THE BASIC ORDINARY SHARE VALUATION FORMULA
3 1 2
0
1 2 3
(1 ) (1 ) (1 ) (1 )
s s s s
D D D D
P
k k k k
f
f


where:
P
0
= value of ordinary share
D
n
= per-share dividend expected at the end of year n
k
s
= required return on an ordinary share.
The equation can be simplied somewhat by redening each years dividend (D
n
)

in terms
of anticipated growth zero growth, constant growth and variable growth.
ZERO GROWTH MODEL
This assumes a constant dividend stream, that is:
D
1
= D
2
= D
3
= D
4
= = D
Hence simplifying the basic ordinary share valuation formula this reduces to:
1
0
s
D
P
k

CONSTANT GROWTH MODEL

This assumes that dividends grow at a constant rate of (1 + g) where g is however less
than the required rate of return k
s
.The basic equation simplies to:
1
0
s
D
P
k g

where :
g is the growth rate
D
1
= D
0
(1 + g) or
D
1
= expected dividend
D
0
= ex-dividend (the just paid dividend)
VARIABLE GROWTH VALUATION MODEL
This model is used to value shares with dividend that exhibit at least two cycles of growth,
for instance where the dividends are initially stagnant (hence zero growth) and then be-
40
gin to grow at a constant rate (constant growth). Under this scenario, the valuation will
be split into two, by rst using the zero growth model for the years that the cash ows
exhibit stagnation and then apply the constant growth model for those years where the
dividends are growing.
11SELF-ASSESSMENT
(1) Which of the following is not typically a feature of preferred stock?
(1) Most preferred stock is non-cumulative
(2) Most preferred stock is cumulative
(3) Preferred stock is generally callable
(4) Preferred stock is typically convertible
(2) You are planning to purchase the stock of B & B Inc. and you expect it to pay a dividend
of R3 in one year, R4,25 in two years and R6 in three years. You expect the stock to
sell for R100 in three years. If your required return for purchasing the stock is 12 per
cent, how much would you pay for the stock?
(1) R75,45
(2) R77,24
(3) R81.52
(4) R85.66
(3) ABS Corporations ordinary share is expected to pay a dividend of R3 forever and
currently sells for R21,42. What is the required rate of return?
(1) 10%
(2) 12%
(3) 13%
(4) 14%
(4) Bongani Corporations common stock currently sells for R180 per share. Bongani
just paid a dividend of R10,18 and dividends are expected to grow at a constant rate
of 6% forever. If the required rate of return is 12%, what will Bongani Corporations
stock sell for one year from now?
(1) R180,00
(2) R187,04
(3) R195,40
(4) R190,80
(5) Citizen Bank is expected to pay an annual dividend of 90 cents per share
indefnitely and the required rate of return equals18%.The value of the share
equals
(1) R 0,16.
(2) R 5,00.
(3) R10,62.
(4) R16,20.
(6) The constant rate of dividend growth for RA Investments is 8%.The enterprise is ex-
pected to pay an annual dividend (D
1
) of R2,50 next year. The required rate of return
(k
s
) equals 18%. The value of the share (P
0
) equals
41 FIN2601
(1) R 9,62.
(2) R13,89.
(3) R25,00.
(4) R31,25.
(7) I&J Ltd is expected to have earnings per share of R2,50 next year. The average price/
earnings ratio for enterprises in the food sector is 18. The value of the enterprises
share is closest to
(1) R7,20.
(2) R13,89.
(3) R20,50.
(4) R45,00.
(8) Khula Ltd has a beta () of 1,2, while the market return equals 18% and the risk free
rate of return equals 12%.The enterprise is expected to pay a dividend (D
1
) of R8,64
next year. The enterprises share is worth
(1) R10,37.
(2) R45,00.
(3) R48,00.
(4) R72,00.
8FEEDBACK ABOUT THE SELF-ASSESSMENT
Question 1 Answer 1
Question 2 Answer 3
Ordinary basic share valuation model
3 1 2
0
1 2 3
...
(1 ) (1 ) (1 ) (1 )
s s s s
D D D D
P
k k k k
f
f



= 3/(1+0.12) + 4.25/(1+0.120)
2
+ 106/(1+0.12)
3
= R81.52
Question 3 Answer 4
Zero growth valuation model
K
s
= D
1
/ P
= 3/21.42
= 14%
Question 4 Answer 3
Constant growth valuation model
Question 5 Answer 2
42
Zero growth valuation model
Question 6 Answer 3
Question 7 Answer 4
Question 8 Answer 2
ACTIVITY
y
Analyse a recent initial public offering (IPO) and determine the growth path of the share.
y
After working through this study unit, attempt the scheduled online tests and quizzes
on chapter 7 on the MyFinanceLab website.
KEY CONCEPTS
y
Constant growth model
y
Gordon model
y
Variable growth model
y
Zero growth model
y
Price/Earnings multiple approach
y
Perpetuity
y
Book value per share
y
Market value per share
y
Preference shares
y
Common stock
y
Free cash flow valuation model
y
Efficient market hypothesis
SUMMARY
This study unit covered the concepts of determining the fair value of equity stock. It
reviewed four models of valuing equity: basic valuation model, zero growth valuation
model, constant growth valuation model and variable growth valuation model. The issue
of ecient markets was also explored.
CHECKLIST
Did you read the chapter in full in order to gain an overall impres-
sion of the content?
Have you completed the activity?
43 FIN2601
Have you completed the assessment?
Have you studied the contents of this chapter?
Have you achieved the learning outcome?
Would you be able to meet the stated assessment criteria?
Have you discussed any challenges with this study unit with fellow
students (personally or via the discussion forum at myUnisa), your
tutor or lecturer?
Did you establish whether any additional resources are available
from myUnisa?
44
128
45 FIN2601
Appendix 1
Financial Tables
INTEREST TABLES
129Table 1: Future-value interest factors for R1 compounded at k per cent for n periods
130
132
133* FVIF > 99999
134
131

FJIF
k,n
(1 k )
n

Period

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

15%

16%

20%

25%

30%

35%

1

1 .01 0

1 .020

1 .020

1 .040

1 .0S0

1 .060

1 .070

1 .080

1 .090

1 .1 00

1 .1 1 0

1 .1 20

1 .1 20

1 .1 40

1 .1 S0

1 .1 60

1 .200

1 .2S0

1 .200

1 .2S0

2

1 .020

1 .040

1 .061

1 .082

1 .1 02

1 .1 24

1 .1 4S

1 .1 66

1 .1 88

1 .21 0

1 .222

1 .2S4

1 .277

1 .200

1 .222

1 .246

1 .440

1 .S62

1 .690

1 .822

2

1 .020

1 .061

1 .092

1 .1 2S

1 .1 S8

1 .1 91

1 .22S

1 .260

1 .29S

1 .221

1 .268

1 .40S

1 .442

1 .482

1 .S21

1 .S61

1 .728

1 .9S2

2.1 97

2.460

4

1 .041

1 .082

1 .1 26

1 .1 70

1 .21 6

1 .262

1 .21 1

1 .260

1 .41 2

1 .464

1 .S1 8

1 .S74

1 .620

1 .689

1 .749

1 .81 1

2.074

2.441

2.8S6

2.222

S

1 .0S1

1 .1 04

1 .1 S9

1 .21 7

1 .276

1 .228

1 .402

1 .469

1 .S29

1 .61 1

1 .68S

1 .762

1 .842

1 .92S

2.01 1

2.1 00

2.488

2.0S2

2.71 2

4.484

6

1 .062

1 .1 26

1 .1 94

1 .26S

1 .240

1 .41 9

1 .S01

1 .S87

1 .677

1 .772

1 .870

1 .974

2.082

2.1 9S

2.21 2

2.426

2.986

2.81 S

4.827

6.0S2

7

1 .072

1 .1 49

1 .220

1 .21 6

1 .407

1 .S04

1 .606

1 .71 4

1 .828

1 .949

2.076

2.21 1

2.2S2

2.S02

2.660

2.826

2.S82

4.768

6.27S

8.1 72

8

1 .082

1 .1 72

1 .267

1 .269

1 .477

1 .S94

1 .71 8

1 .8S1

1 .992

2.1 44

2.20S

2.476

2.6S8

2.8S2

2.0S9

2.278

4.200

S.960

8.1 S7

1 1 .02

9

1 .094

1 .1 9S

1 .20S

1 .422

1 .SS1

1 .689

1 .828

1 .999

2.1 72

2.2S8

2.SS8

2.772

2.004

2.2S2

2.S1 8

2.802

S.1 60

7.4S1

1 0.60

1 4.89

1 0

1 .1 0S

1 .21 9

1 .244

1 .480

1 .629

1 .791

1 .967

2.1 S9

2.267

2.S94

2.829

2.1 06

2.29S

2.707

4.046

4.41 1

6.1 92

9.21 2

1 2.79

20.1 1

1 1

1 .1 1 6

1 .242

1 .284

1 .S29

1 .71 0

1 .898

2.1 0S

2.222

2.S80

2.8S2

2.1 S2

2.479

2.826

4.226

4.6S2

S.1 1 7

7.420

1 1 .64

1 7.92

27.1 4

1 2

1 .1 27

1 .268

1 .426

1 .601

1 .796

2.01 2

2.2S2

2.S1 8

2.81 2

2.1 28

2.498

2.896

4.22S

4.81 8

S.2S0

S.926

8.91 6

1 4.SS

22.20

26.64

1 2

1 .1 28

1 .294

1 .469

1 .66S

1 .886

2.1 22

2.41 0

2.720

2.066

2.4S2

2.882

4.262

4.898

S.492

6.1 S2

6.886

1 0.70

1 8.1 9

20.29

49.47

1 4

1 .1 49

1 .21 9

1 .S1 2

1 .722

1 .980

2.261

2.S79

2.927

2.242

2.797

4.21 0

4.887

S.S2S

6.261

7.076

7.988

1 2.84

22.74

29.27

66.78

1 S

1 .1 61

1 .246

1 .SS8

1 .801

2.079

2.297

2.7S9

2.1 72

2.642

4.1 77

4.78S

S.474

6.2S4

7.1 28

8.1 27

9.266

1 S.41

28.42

S1 .1 9

90.1 6

1 6

1 .1 72

1 .272

1 .60S

1 .872

2.1 82

2.S40

2.9S2

2.426

2.970

4.S9S

S.21 1

6.1 20

7.067

8.1 27

9.2S8

1 0.7S

1 8.49

2S.S2

66.S4

1 21 .7

1 7

1 .1 84

1 .400

1 .6S2

1 .948

2.292

2.692

2.1 S9

2.700

4.228

S.0S4

S.89S

6.866

7.986

9.276

1 0.76

1 2.47

22.1 9

44.41

86.S0

1 64.2

1 8

1 .1 96

1 .428

1 .702

2.026

2.407

2.8S4

2.280

2.996

4.71 7

S.S60

6.S44

7.690

9.024

1 0.S8

1 2.28

1 4.46

26.62

SS.S1

1 1 2.S

221 .8

1 9

1 .208

1 .4S7

1 .7S4

2.1 07

2.S27

2.026

2.61 7

4.21 6

S.1 42

6.1 1 6

7.262

8.61 2

1 0.20

1 2.06

1 4.22

1 6.78

21 .9S

69.29

1 46.2

299.S

20

1 .220

1 .486

1 .806

2.1 91

2.6S2

2.207

2.870

4.661

S.604

6.727

8.062

9.646

1 1 .S2

1 2.74

1 6.27

1 9.46

28.24

86.74

1 90.0

404.2

21

1 .222

1 .S1 6

1 .860

2.279

2.786

2.400

4.1 41

S.024

6.1 09

7.400

8.949

1 0.80

1 2.02

1 S.67

1 8.82

22.S7

46.01

1 08.4

247.1

S4S.8

22

1 .24S

1 .S46

1 .91 6

2.270

2.92S

2.604

4.420

S.427

6.6S9

8.1 40

9.924

1 2.1 0

1 4.71

1 7.86

21 .64

26.1 9

SS.21

1 2S.S

221 .2

726.8

22

1 .2S7

1 .S77

1 .974

2.46S

2.072

2.820

4.741

S.871

7.2S8

8.9S4

1 1 .02

1 2.SS

1 6.62

20.26

24.89

20.28

66.2S

1 69.4

41 7.S

994.7

24

1 .270

1 .608

2.022

2.S62

2.22S

4.049

S.072

6.241

7.91 1

9.8S0

1 2.24

1 S.1 8

1 8.79

22.21

28.62

2S.24

79.S0

21 1 .8

S42.8

1 242

2S

1 .282

1 .641

2.094

2.666

2.286

4.292

S.427

6.848

8.622

1 0.82

1 2.S9

1 7.00

21 .22

26.46

22.92

40.87

9S.40

264.7

70S.6

1 81 2

20

1 .248

1 .81 1

2.427

2.242

4.222

S.742

7.61 2

1 0.06

1 2.27

1 7.4S

22.89

29.96

29.1 2

S0.9S

66.21

8S.8S

227.4

807.8

2620

81 29

2S

1 .41 7

2.000

2.81 4

2.946

S.S1 6

7.686

1 0.68

1 4.79

20.41

28.1 0

28.S7

S2.80

72.07

98.1 0

1 22.2

1 80.2

S90.7

246S

9728

26449

40

1 .489

2.208

2.262

4.801

7.040

1 0.29

1 4.97

21 .72

21 .41

4S.26

6S.00

92.0S

1 22.8

1 88.9

267.9

278.7

1 470

7S22

261 1 9

-

4S

1 .S6S

2.428

2.782

S.841

8.98S

1 2.76

21 .00

21 .92

48.22

72.89

1 09.S

1 64.0

244.6

262.7

S28.8

79S.4

26S7

229S9

-

-

S0

1 .64S

2.692

4.284

7.1 07

1 1 .47

1 8.42

29.46

46.90

74.26

1 1 7.4

1 84.6

289.0

4S0.7

700.2

1 084

1 671

91 00

7006S

-

-
46
135Table 2: Future-value interest factors for a R1 annuity compounded at k per cent
for n periods
136
137
138* FVIFA > 99999
139
n
PJIFA
k,n

(1 k )
t-1
t1



1 7

27

27

47

S7

67

77

87

97

1 07

1 1 7

1 27

1 27

1 47

1 S7

1 67

207

2S7

207

2S7

1

1 .000

1 .000

1 .000

1 .000

1 .000

1 .000

1 .000

1 .000

1 .000

1 .000

1 .000

1 .000

1 .000

1 .000

1 .000

1 .000

1 .000

1 .000

1 .000

1 .000

2

2.01 0

2.020

2.020

2.040

2.0S0

2.060

2.070

2.080

2.090

2.1 00

2.1 1 0

2.1 20

2.1 20

2.1 40

2.1 S0

2.1 60

2.200

2.2S0

2.200

2.2S0

2

2.020

2.060

2.091

2.1 22

2.1 S2

2.1 84

2.21 S

2.246

2.278

2.21 0

2.242

2.274

2.407

2.440

2.472

2.S06

2.640

2.81 2

2.990

4.1 72

4

4.060

4.1 22

4.1 84

4.246

4.21 0

4.27S

4.440

4.S06

4.S72

4.641

4.71 0

4.779

4.8S0

4.921

4.992

S.066

S.268

S.766

6.1 87

6.622

S

S.1 01

S.204

S.209

S.41 6

S.S26

S.627

S.7S1

S.867

S.98S

6.1 0S

6.228

6.2S2

6.480

6.61 0

6.742

6.877

7.442

8.207

9.042

9.9S4

6

6.1 S2

6.208

6.468

6.622

6.802

6.97S

7.1 S2

7.226

7.S22

7.71 6

7.91 2

8.1 1 S

8.222

8.S26

8.7S4

8.977

9.920

1 1 .2S9

1 2.7S6

1 4.428

7

7.21 4

7.424

7.662

7.898

8.1 42

8.294

8.6S4

8.922

9.200

9.487

9.782

1 0.089

1 0.40S

1 0.720

1 1 .067

1 1 .41 4

1 2.91 6

1 S.072

1 7.S82

20.492

8

8.286

8.S82

8.892

9.21 4

9.S49

9.897

1 0.26

1 0.64

1 1 .02

1 1 .44

1 1 .86

1 2.20

1 2.76

1 2.22

1 2.72

1 4.24

1 6.S0

1 9.84

22.86

28.66

9

9.269

9.7SS

1 0.1 6

1 0.S8

1 1 .02

1 1 .49

1 1 .98

1 2.49

1 2.02

1 2.S8

1 4.1 6

1 4.78

1 S.42

1 6.09

1 6.79

1 7.S2

20.80

2S.80

22.01

29.70

1 0

1 0.46

1 0.9S

1 1 .46

1 2.01

1 2.S8

1 2.1 8

1 2.82

1 4.49

1 S.1 9

1 S.94

1 6.72

1 7.SS

1 8.42

1 9.24

20.20

21 .22

2S.96

22.2S

42.62

S4.S9

1 1

1 1 .S7

1 2.1 7

1 2.81

1 2.49

1 4.21

1 4.97

1 S.78

1 6.6S

1 7.S6

1 8.S2

1 9.S6

20.6S

21 .81

22.04

24.2S

2S.72

22.1 S

42.S7

S6.41

74.70

1 2

1 2.68

1 2.41

1 4.1 9

1 S.02

1 S.92

1 6.87

1 7.89

1 8.98

20.1 4

21 .28

22.71

24.1 2

2S.6S

27.27

29.00

20.8S

29.S8

S4.21

74.22

1 01 .8

1 2

1 2.81

1 4.68

1 S.62

1 6.62

1 7.71

1 8.88

20.1 4

21 .S0

22.9S

24.S2

26.21

28.02

29.98

22.09

24.2S

26.79

48.S0

68.76

97.62

1 28.S

1 4

1 4.9S

1 S.97

1 7.09

1 8.29

1 9.60

21 .02

22.SS

24.21

26.02

27.97

20.09

22.29

24.88

27.S8

40.S0

42.67

S9.20

86.9S

1 27.9

1 88.0

1 S

1 6.1 0

1 7.29

1 8.60

20.02

21 .S8

22.28

2S.1 2

27.1 S

29.26

21 .77

24.41

27.28

40.42

42.84

47.S8

S1 .66

72.04

1 09.7

1 67.2

2S4.7

1 6

1 7.26

1 8.64

20.1 6

21 .82

22.66

2S.67

27.89

20.22

22.00

2S.9S

29.1 9

42.7S

46.67

S0.98

SS.72

60.92

87.44

1 28.1

21 8.S

244.9

1 7

1 8.42

20.01

21 .76

22.70

2S.84

28.21

20.84

22.7S

26.97

40.S4

44.S0

48.88

S2.74

S9.1 2

6S.08

71 .67

1 0S.9

1 72.6

28S.0

466.6

1 8

1 9.61

21 .41

22.41

2S.6S

28.1 2

20.91

24.00

27.4S

41 .20

4S.60

S0.40

SS.7S

61 .72

68.29

7S.84

84.1 4

1 28.1

21 8.0

271 .S

620.9

1 9

20.81

22.84

2S.1 2

27.67

20.S4

22.76

27.28

41 .4S

46.02

S1 .1 6

S6.94

62.44

70.7S

78.97

88.21

98.60

1 S4.7

272.6

484.0

8S2.7

20

22.02

24.20

26.87

29.78

22.07

26.79

41 .00

4S.76

S1 .1 6

S7.27

64.20

72.0S

80.9S

91 .02

1 02.4

1 1 S.4

1 86.7

242.9

620.2

1 1 S2

21

22.24

2S.78

28.68

21 .97

2S.72

29.99

44.87

S0.42

S6.76

64.00

72.27

81 .70

92.47

1 04.8

1 1 8.8

1 24.8

22S.0

429.7

820.2

1 SS6

22

24.47

27.20

20.S4

24.2S

28.S1

42.29

49.01

SS.46

62.87

71 .40

81 .21

92.S0

1 0S.S

1 20.4

1 27.6

1 S7.4

271 .0

S28.1

1 067

21 02

22

2S.72

28.84

22.4S

26.62

41 .42

47.00

S2.44

60.89

69.S2

79.S4

91 .1 S

1 04.6

1 20.2

1 28.2

1 S9.2

1 82.6

226.2

672.6

1 288

2829

24

26.97

20.42

24.42

29.08

44.S0

S0.82

S8.1 8

66.76

76.79

88.S0

1 02.2

1 1 8.2

1 26.8

1 S8.7

1 84.2

21 4.0

292.S

842.0

1 806

2824

2S

28.24

22.02

26.46

41 .6S

47.72

S4.86

62.2S

72.1 1

84.70

98.2S

1 1 4.4

1 22.2

1 SS.6

1 81 .9

21 2.8

249.2

472.0

1 0SS

2249

S1 77

20

24.78

40.S7

47.S8

S6.08

66.44

79.06

94.46

1 1 2.2

1 26.2

1 64.S

1 99.0

241 .2

292.2

2S6.8

424.7

S20.2

1 1 82

2227

8720

22222

2S

41 .66

49.99

60.46

72.6S

90.22

1 1 1 .4

1 28.2

1 72.2

21 S.7

271 .0

241 .6

421 .7

S46.7

692.6

881 .2

1 1 21

2948

98S7

22422

-

40

48.89

60.40

7S.40

9S.02

1 20.8

1 S4.8

1 99.6

2S9.1

227.9

442.6

S81 .8

767.1

1 01 4

1 242

1 779

2261

7244

20089

-

-

4S

S6.48

71 .89

92.72

1 21 .0

1 S9.7

21 2.7

28S.7

286.S

S2S.9

71 8.9

986.6

1 2S8

1 874

2S91

2S8S

496S

1 8281

91 821

-

-

S0

64.46

84.S8

1 1 2.8

1 S2.7

209.2

290.2

406.S

S72.8

81 S.1

1 1 64

1 669

2400

2460

499S

721 8

1 0426

4S497

-

-

-

47 FIN2601
140Table 3: Present-value interest factors for R1 discounted at k per cent for n periods
141
142
143
144* PVIF = .000 when rounded to three decimal places
145

PJIFA
k,n

1
(1 k )
n



1 7

27

27

47

S7

67

77

87

97

1 07

1 1 7

1 27

1 27

1 47

1 S7

1 67

207

2S7

207

2S7

1

0.990

0.980

0.971

0.962

0.9S2

0.942

0.92S

0.926

0.91 7

0.909

0.901

0.892

0.88S

0.877

0.870

0.862

0.822

0.800

0.769

0.741

2

0.980

0.961

0.942

0.92S

0.907

0.890

0.872

0.8S7

0.842

0.826

0.81 2

0.797

0.782

0.769

0.7S6

0.742

0.694

0.640

0.S92

0.S49

2

0.971

0.942

0.91 S

0.889

0.864

0.840

0.81 6

0.794

0.772

0.7S1

0.721

0.71 2

0.692

0.67S

0.6S8

0.641

0.S79

0.S1 2

0.4SS

0.406

4

0.961

0.924

0.888

0.8SS

0.822

0.792

0.762

0.72S

0.708

0.682

0.6S9

0.626

0.61 2

0.S92

0.S72

0.SS2

0.482

0.41 0

0.2S0

0.201

S

0.9S1

0.906

0.862

0.822

0.784

0.747

0.71 2

0.681

0.6S0

0.621

0.S92

0.S67

0.S42

0.S1 9

0.497

0.476

0.402

0.228

0.269

0.222

6

0.942

0.888

0.827

0.790

0.746

0.70S

0.666

0.620

0.S96

0.S64

0.S2S

0.S07

0.480

0.4S6

0.422

0.41 0

0.22S

0.262

0.207

0.1 6S

7

0.922

0.871

0.81 2

0.760

0.71 1

0.66S

0.622

0.S82

0.S47

0.S1 2

0.482

0.4S2

0.42S

0.400

0.276

0.2S4

0.279

0.21 0

0.1 S9

0.1 22

8

0.922

0.8S2

0.789

0.721

0.677

0.627

0.S82

0.S40

0.S02

0.467

0.424

0.404

0.276

0.2S1

0.227

0.20S

0.222

0.1 68

0.1 22

0.091

9

0.91 4

0.827

0.766

0.702

0.64S

0.S92

0.S44

0.S00

0.460

0.424

0.291

0.261

0.222

0.208

0.284

0.262

0.1 94

0.1 24

0.094

0.067

1 0

0.90S

0.820

0.744

0.676

0.61 4

0.SS8

0.S08

0.462

0.422

0.286

0.2S2

0.222

0.29S

0.270

0.247

0.227

0.1 62

0.1 07

0.072

0.0S0

1 1

0.896

0.804

0.722

0.6S0

0.S8S

0.S27

0.47S

0.429

0.288

0.2S0

0.21 7

0.287

0.261

0.227

0.21 S

0.1 9S

0.1 2S

0.086

0.0S6

0.027

1 2

0.887

0.788

0.701

0.62S

0.SS7

0.497

0.444

0.297

0.2S6

0.21 9

0.286

0.2S7

0.221

0.208

0.1 87

0.1 68

0.1 1 2

0.069

0.042

0.027

1 2

0.879

0.772

0.681

0.601

0.S20

0.469

0.41 S

0.268

0.226

0.290

0.2S8

0.229

0.204

0.1 82

0.1 62

0.1 4S

0.092

0.0SS

0.022

0.020

1 4

0.870

0.7S8

0.661

0.S77

0.S0S

0.442

0.288

0.240

0.299

0.262

0.222

0.20S

0.1 81

0.1 60

0.1 41

0.1 2S

0.078

0.044

0.02S

0.01 S

1 S

0.861

0.742

0.642

0.SSS

0.481

0.41 7

0.262

0.21 S

0.27S

0.229

0.209

0.1 82

0.1 60

0.1 40

0.1 22

0.1 08

0.06S

0.02S

0.020

0.01 1

1 6

0.8S2

0.728

0.622

0.S24

0.4S8

0.294

0.229

0.292

0.2S2

0.21 8

0.1 88

0.1 62

0.1 41

0.1 22

0.1 07

0.092

0.0S4

0.028

0.01 S

0.008

1 7

0.844

0.71 4

0.60S

0.S1 2

0.426

0.271

0.21 7

0.270

0.221

0.1 98

0.1 70

0.1 46

0.1 2S

0.1 08

0.092

0.080

0.04S

0.022

0.01 2

0.006

1 8

0.826

0.700

0.S87

0.494

0.41 6

0.2S0

0.296

0.2S0

0.21 2

0.1 80

0.1 S2

0.1 20

0.1 1 1

0.09S

0.081

0.069

0.028

0.01 8

0.009

0.00S

1 9

0.828

0.686

0.S70

0.47S

0.296

0.221

0.277

0.222

0.1 94

0.1 64

0.1 28

0.1 1 6

0.098

0.082

0.070

0.060

0.021

0.01 4

0.007

0.002

20

0.820

0.672

0.SS4

0.4S6

0.277

0.21 2

0.2S8

0.21 S

0.1 78

0.1 49

0.1 24

0.1 04

0.087

0.072

0.061

0.0S1

0.026

0.01 2

0.00S

0.002

21

0.81 1

0.660

0.S28

0.429

0.2S9

0.294

0.242

0.1 99

0.1 64

0.1 2S

0.1 1 2

0.092

0.077

0.064

0.0S2

0.044

0.022

0.009

0.004

0.002

22

0.802

0.647

0.S22

0.422

0.242

0.278

0.226

0.1 84

0.1 S0

0.1 22

0.1 01

0.082

0.068

0.0S6

0.046

0.028

0.01 8

0.007

0.002

0.001

22

0.79S

0.624

0.S07

0.406

0.226

0.262

0.21 1

0.1 70

0.1 28

0.1 1 2

0.091

0.074

0.060

0.049

0.040

0.022

0.01 S

0.006

0.002

0.001

24

0.788

0.622

0.492

0.290

0.21 0

0.247

0.1 97

0.1 S8

0.1 26

0.1 02

0.082

0.066

0.0S2

0.042

0.02S

0.028

0.01 2

0.00S

0.002

0.001

2S

0.780

0.61 0

0.478

0.27S

0.29S

0.222

0.1 84

0.1 46

0.1 1 6

0.092

0.074

0.0S9

0.047

0.028

0.020

0.024

0.01 0

0.004

0.001

0.001

20

0.742

0.SS2

0.41 2

0.208

0.221

0.1 74

0.1 21

0.099

0.07S

0.0S7

0.044

0.022

0.026

0.020

0.01 S

0.01 2

0.004

0.001

-

-

2S

0.706

0.S00

0.2SS

0.2S2

0.1 81

0.1 20

0.094

0.068

0.049

0.026

0.026

0.01 9

0.01 4

0.01 0

0.008

0.006

0.002

-

-

-

40

0.672

0.4S2

0.207

0.208

0.1 42

0.097

0.067

0.046

0.022

0.022

0.01 S

0.01 1

0.008

0.00S

0.004

0.002

0.001

-

-

-

4S

0.629

0.41 0

0.264

0.1 71

0.1 1 1

0.072

0.048

0.021

0.021

0.01 4

0.009

0.006

0.004

0.002

0.002

0.001

0.000

-

-

-

S0

0.608

0.272

0.228

0.1 41

0.087

0.0S4

0.024

0.021

0.01 2

0.009

0.00S

0.002

0.002

0.001

0.001

0.001

-

-

-

-
48
146Table 4: Present-value interest factors for a R1 annuity discounted at k per cent for
n periods
147
149
150
148
n
PJIFA
k,n

1
t1 (1 K )
t



1 7

27

27

47

S7

67

77

87

97

1 07

1 1 7

1 27

1 27

1 47

1 S7

1 67

207

2S7

207

2S7

1

0.990

0.980

0.971

0.962

0.9S2

0.942

0.92S

0.926

0.91 7

0.909

0.901

0.892

0.88S

0.877

0.870

0.862

0.822

0.800

0.769

0.741

2

1 .970

1 .942

1 .91 2

1 .886

1 .8S9

1 .822

1 .808

1 .782

1 .7S9

1 .726

1 .71 2

1 .690

1 .668

1 .647

1 .626

1 .60S

1 .S28

1 .440

1 .261

1 .289

2

2.941

2.884

2.829

2.77S

2.722

2.672

2.624

2.S77

2.S21

2.487

2.444

2.402

2.261

2.222

2.282

2.246

2.1 06

1 .9S2

1 .81 6

1 .696

4

2.902

2.808

2.71 7

2.620

2.S46

2.46S

2.287

2.21 2

2.240

2.1 70

2.1 02

2.027

2.974

2.91 4

2.8SS

2.798

2.S89

2.262

2.1 66

1 .997

S

4.8S2

4.71 2

4.S80

4.4S2

4.229

4.21 2

4.1 00

2.992

2.890

2.791

2.696

2.60S

2.S1 7

2.422

2.2S2

2.274

2.991

2.689

2.426

2.220

6

S.79S

S.601

S.41 7

S.242

S.076

4.91 7

4.767

4.622

4.486

4.2SS

4.221

4.1 1 1

2.998

2.889

2.784

2.68S

2.226

2.9S1

2.642

2.28S

7

6.728

6.472

6.220

6.002

S.786

S.S82

S.289

S.206

S.022

4.868

4.71 2

4.S64

4.422

4.288

4.1 60

4.029

2.60S

2.1 61

2.802

2.S08

8

7.6S2

7.22S

7.020

6.722

6.462

6.21 0

S.971

S.747

S.S2S

S.22S

S.1 46

4.968

4.799

4.629

4.487

4.244

2.827

2.229

2.92S

2.S98

9

8.S66

8.1 62

7.786

7.42S

7.1 08

6.802

6.S1 S

6.247

S.99S

S.7S9

S.S27

S.228

S.1 22

4.946

4.772

4.607

4.021

2.462

2.01 9

2.66S

1 0

9.471

8.982

8.S20

8.1 1 1

7.722

7.260

7.024

6.71 0

6.41 8

6.1 4S

S.889

S.6S0

S.426

S.21 6

S.01 9

4.822

4.1 92

2.S71

2.092

2.71 S

1 1

1 0.27

9.787

9.2S2

8.760

8.206

7.887

7.499

7.1 29

6.80S

6.49S

6.207

S.928

S.687

S.4S2

S.224

S.029

4.227

2.6S6

2.1 47

2.7S2

1 2

1 1 .26

1 0.S8

9.9S4

9.28S

8.862

8.284

7.942

7.S26

7.1 61

6.81 4

6.492

6.1 94

S.91 8

S.660

S.421

S.1 97

4.429

2.72S

2.1 90

2.779

1 2

1 2.1 2

1 1 .2S

1 0.62

9.986

9.294

8.8S2

8.2S8

7.904

7.487

7.1 02

6.7S0

6.424

6.1 22

S.842

S.S82

S.242

4.S22

2.780

2.222

2.799

1 4

1 2.00

1 2.1 1

1 1 .20

1 0.S6

9.899

9.29S

8.74S

8.244

7.786

7.267

6.982

6.628

6.202

6.002

S.724

S.468

4.61 1

2.824

2.249

2.81 4

1 S

1 2.87

1 2.8S

1 1 .94

1 1 .1 2

1 0.28

9.71 2

9.1 08

8.SS9

8.061

7.606

7.1 91

6.81 1

6.462

6.1 42

S.847

S.S7S

4.67S

2.8S9

2.268

2.82S

1 6

1 4.72

1 2.S8

1 2.S6

1 1 .6S

1 0.84

1 0.1 1

9.447

8.8S1

8.21 2

7.824

7.279

6.974

6.604

6.26S

S.9S4

S.668

4.720

2.887

2.282

2.824

1 7

1 S.S6

1 4.29

1 2.1 7

1 2.1 7

1 1 .27

1 0.48

9.762

9.1 22

8.S44

8.022

7.S49

7.1 20

6.729

6.272

6.047

S.749

4.77S

2.91 0

2.29S

2.840

1 8

1 6.40

1 4.99

1 2.7S

1 2.66

1 1 .69

1 0.82

1 0.06

9.272

8.7S6

8.201

7.702

7.2S0

6.840

6.467

6.1 28

S.81 8

4.81 2

2.928

2.204

2.844

1 9

1 7.22

1 S.68

1 4.22

1 2.1 2

1 2.09

1 1 .1 6

1 0.24

9.604

8.9S0

8.26S

7.829

7.266

6.928

6.SS0

6.1 98

S.877

4.842

2.942

2.21 1

2.848

20

1 8.0S

1 6.2S

1 4.88

1 2.S9

1 2.46

1 1 .47

1 0.S9

9.81 8

9.1 29

8.S1 4

7.962

7.469

7.02S

6.622

6.2S9

S.929

4.870

2.9S4

2.21 6

2.8S0

21

1 8.86

1 7.01

1 S.42

1 4.02

1 2.82

1 1 .76

1 0.84

1 0.02

9.292

8.649

8.07S

7.S62

7.1 02

6.687

6.21 2

S.972

4.891

2.962

2.220

2.8S2

22

1 9.66

1 7.66

1 S.94

1 4.4S

1 2.1 6

1 2.04

1 1 .06

1 0.20

9.442

8.772

8.1 76

7.64S

7.1 70

6.742

6.2S9

6.01 1

4.909

2.970

2.222

2.8S2

22

20.46

1 8.29

1 6.44

1 4.86

1 2.49

1 2.20

1 1 .27

1 0.27

9.S80

8.882

8.266

7.71 8

7.220

6.792

6.299

6.044

4.92S

2.976

2.22S

2.8S4

24

21 .24

1 8.91

1 6.94

1 S.2S

1 2.80

1 2.SS

1 1 .47

1 0.S2

9.707

8.98S

8.248

7.784

7.282

6.82S

6.424

6.072

4.927

2.981

2.227

2.8SS

2S

22.02

1 9.S2

1 7.41

1 S.62

1 4.09

1 2.78

1 1 .6S

1 0.67

9.822

9.077

8.422

7.842

7.220

6.872

6.464

6.097

4.948

2.98S

2.229

2.8S6

20

2S.81

22.40

1 9.60

1 7.29

1 S.27

1 2.76

1 2.41

1 1 .26

1 0.27

9.427

8.694

8.0SS

7.496

7.002

6.S66

6.1 77

4.979

2.99S

2.222

2.8S7

2S

29.41

2S.00

21 .49

1 8.66

1 6.27

1 4.S0

1 2.9S

1 1 .6S

1 0.S7

9.644

8.8SS

8.1 76

7.S86

7.070

6.61 7

6.21 S

4.992

2.998

2.222

2.8S7

40

22.82

27.26

22.1 1

1 9.79

1 7.1 6

1 S.0S

1 2.22

1 1 .92

1 0.76

9.779

8.9S1

8.244

7.624

7.1 0S

6.642

6.222

4.997

2.999

2.222

2.8S7

4S

26.09

29.49

24.S2

20.72

1 7.77

1 S.46

1 2.61

1 2.1 1

1 0.88

9.862

9.008

8.282

7.661

7.1 22

6.6S4

6.242

4.999

4.000

2.222

2.8S7

S0

29.20

21 .42

2S.72

21 .48

1 8.26

1 S.76

1 2.80

1 2.22

1 0.96

9.91 S

9.042

8.204

7.67S

7.1 22

6.661

6.246

4.999

4.000

2.222

2.8S7
49 FIN2601