STUDENT ID :- MC090201797

Student Name:- Adnan Pervaiz

MGT 201 Financial Management Assignment

Question No 1:- Given the following information for the stock of Foster Company, calculate its
beta.
Current price per share of common Rs.80.00
Expected dividend per share next year Rs.5.00
Constant annual dividend growth rate 7%
Risk free rate of return 6%
Return on market portfolio 10%

ANSWER:

Formula bond Present value

Po* =Div1/[(rRF+(rM-rRF)* Beta)-g)]

As
Po* = Current Price of the market = 80
Div1 = Forecasted Dividend in upcoming year = 5
rRF = Risk Free Rate of Return = 6% =0.06
rM = Expected Market Rate of Return = 10% =0.01
g = Growth Rate = 7% = 0.07

Now Putting All Given Value In Formula

80 = 5/[0.06+(0.1-0.06)* Beta)-0.07)]
80 = 5/[0.06+(0.04)* Beta)-0.07)]
80 = 5/[0.06+0.04* Beta)-0.07]
80 = 5/(0.04* Beta)-0.01
0.04Beta = (5/80)+(0.01)
0.04 Beta= 0.0625+0.01
0.04 Beta= 0.0725
Beta = 0.0725/0.04
Beta = 1.81 Answer

Question No 2:- ABC Company is considering investing in either of the two outstanding bonds.
Both bonds have Rs.2,000 par values and 10% coupon interest rates and pay annual interests.
Bond A has exactly 3 years to maturity, and bond B has 5 years to maturity.
a) Calculate the value of bond A if the required rate of return is 14%.
b) Calculate the value of bond B if the required rate of return is 14%.
c) If ABC wants to minimize the Interest Rate Risk, which bond should be
purchased? Why.
a) Calculate the value of bond A if the required rate of return is 14%.

Formula for the Bond current price/present Value

PV =Po*= CFt/(1+rD)t
Where
CF =Annual Coupon Payment=Coupon Rate*Par Value of Bond
CF =0.1*2000=200
rD =Required Rate of Return on Bond
PV =Po*=CF1/(1+rD)+CF2/(1+rD)2+CF3/(1+rD)3 + Par Value/(1+rD)3
PV =Po*= 200/(1+0.14) + 200/(1+0.14)2 + 200/(1+0.14)3 + 2000/(1+0.14)3
PV =Po*= 200/1.14 + 200/(1.14)2 + 200/(1.14)3 + 2000/(1.14)3
PV =Po*= (200/1.14 )+( 200/1.2996 )+ (200/1.481544 ) + (2000/1.481544)
PV = 1816 Answer

b) Calculate the value of bond B if the required rate of return is 14%.

PV =CF1/(1+rD)+CF2/(1+rD)2+CF3/(1+rD)3 + Par Value/(1+rD)3

PV =CF1/(1+rD)+CF2/(1+rD)2+CF3/(1+rD)3 + CF4/(1+rD)4+CF5/(1+rD)5 + Par

Value/(1+rD)5

PV =200/(1+0.14) + 200/(1+0.14)2 + 200/(1+0.14)3 + 200/(1+0.14)4 + 200/(1+0.14)5

+2000/(1+0.14)5

PV =200/1.14 + 200/(1.14)2 + 200/(1.14)3 + 200/(1.14)4+ 200/(1.14)5 + 2000/(1.14)5

PV =(200/1.14 )+( 200/1.29 )+ (200/1.48 ) + (200/1.68) +
( 200/1.92) +(2000/1.92)

PV = 1727 Answer

c) If ABC wants to minimize the Interest Rate Risk, which bond should be
purchased? Why.

If ABC purchases 5 years mature bond B then the return can differ from the YTM
and there will high risk also involve so to minimize risk ABC will purchase bond A.
The bonds have less maturity are less risky than long term bond. People don,t like risk
and there is high risk involve due to longer maturity so bond B has longer maturity thus
ABC will purchase Bond A.