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of 12 percent will mature after 6

years. What is the value of the bond, if the

discount rate is 16 percent?

A Rs.100 par value bond, bearing a coupon rate of 9

percent will mature after 4

years. What is the value of the bond, if the discount

rate is 13 percent?

A Rs.1000 par value bond bears a coupon rate of

10 percent and matures after 5 years. Interest is

payable semi-annually. Compute the value of

the bond if the required rate of return is 18

percent.

P3

The market value of a Rs.1,000 par value bond,

carrying a coupon rate of 10 percent and

maturing after 5 years, is Rs.850. What is the

yield to maturity on this bond?

The price of a Rs.1,000 par bond carrying a

coupon rate of 8 percent and maturing

after 5 years is Rs.1020.

(i) What is the approximate YTM?

(ii) What will be the realised YTM if the

reinvestment rate is 7 percent?

The price of a Rs.1,000 par bond carrying a

coupon rate of 7 percent and maturing

after 5 years is Rs.1040.

(i) What is the approximate YTM?

(ii) What will be the realised YTM if the

reinvestment rate is 6 percent?

CASE STUDY

(i) What is Phoenix’s pre-tax cost of debt? (Use the approximate

yield formula)

(ii) What is Phoenix’ cost of equity using the constant growth

dividend discount model?

(iii) What is Phoenix’s post tax weighted average cost of capital?

Use the CAPM to estimate the cost of equity and employ the

weights in the target capital structure.

Phoenix’s pre-tax cost of debt

Post tax weighted average cost of capital? Use the CAPM to estimate

the cost of equity and employ the weights in the target capital

structure

CASE STUDIES IN FINANCE: Kate Myers

After graduating from Ohio State University with a degree in Finance, Kate Myers

took a position as a stock broker with Merrill Lynch in Cleveland. Although she

had several college loans to make payments on, her goal was to set aside funds

for the next eight years in order to make a down payment on a house. After

considering the various suburbs of Cleveland, Kate chose Lakewood as her

desired future residency. Based on median house price data, she learned that a

three-bedroom, two-bath house currently costs $98 000. Kate wants to make a

down payment of 20 per cent.

Because it will be eight years before Kate buys a house, the $98 000 price will

surely not be the same in the future. To estimate the rate at which the median

house price will increase, she considered the historical price appreciation in

Lakewood. In the past, homes appreciated by nearly four per cent per annum.

Kate was satisfied with this estimation. Merrill Lynch provides several

opportunities for Kate to invest the funds that will be devoted to the purchase of

her future home. She feels that a balanced account containing stocks, bonds, and

government securities would realistically achieve an annual rate of return of eight

per cent.

• 1. Taking into consideration the fact that the $98,000 home price will grow at four

per cent per year, what will be the future median home selling price in Lakewood

in eight years?

• 2. What amount will Kate Myers have to accumulate as a down payment if she

does decide to buy a house in Lakewood?

• 3. If Kate decides to make end-of-the-year deposits into the Merrill Lynch account,

how much would these deposits be?

• 4. If homes in Lakewood appreciate by six per cent per annum over the next eight

years instead of the assumed four per cent, how much would Kate have to deposit

at the end of each year to make the down payment?

• 5. What if the appreciation in home prices is only by two per cent per year, how

much would Kate have to deposit at the end of each year to make the down

payment?

• 6. If Kate decided to deposit her down payment funds in less risky certificates of

deposit (CDs) earning only four per cent, how much would she have to deposit at

the end of each year to make the down payment?

• 7. If Kate pursued a more risky investment of growth stocks that have an expected

return of 12 per cent, how much would she have to deposit at the end of each

year to make the down payment?

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