WORKBOOK UNIT-4

SUBJECT: FPWM

Name of the Participant

MU Registration No

Batch and Section

Unit Topics Page

Number
1 Introduction to Financial Planning 1-6
2 Introduction to Investment Planning -Return 7- 12
3 Financial Market 13-17
4 Security Valuation 18- 25
5 Risk & Return
6 FA & TA
7 Asset Allocation
8 Derivatives
9 Tax Planning

UNIT No. 4 WebEx held on June 2022

Topic: Security Valuation

Exercise 1
Case let:
Bonds form a significant portion of the financial market and are a key source of capital for the
corporate world. A bond is a debt instrument that provides a periodic stream of interest
payments to investors while repaying the principal sum on a specified maturity date. A bond’s
terms and conditions are contained in a legal contract between the buyer and the seller, known
as the indenture. Bonds are issued by borrowers to raise funds for long-term investments; the
main issuers of bonds in India are: The Government, Corporations, Municipalities & Foreign
Entities.
Here is a Case let on Valuation of Bonds to test you:
1. P E Entertainment Ltd 9.875% bond matures in 2 years. Assume that the interest on
these bonds is paid and compounded annually. Determine the value of Rs.1, 000 denomination
Planet Earth Entertainment’s bond as of today if the required rate of return is 7 percent.
A. Rs.1,101.93
B. Rs.1051.94
C. Rs.1,291.93
D. Rs.1,151.93
2. Determine the value of a Rs.1, 000 denomination, 9.875%, 2 years IFC’s bond as of today if
the required rate of return is 11percent.
A. Rs.980.71
B. Rs.993.75
C. Rs.998.75
D. Rs.913.75
3. A DGM Corporation bond (FV Rs.1000) pays a 14.5% coupon on a semi-annual basis. What is
the value of this bond if it matures in 2 years and the market rate is 11%?
A. Rs.1,160.82
B. Rs.1,210.82
C. Rs.1061.32
D. Rs.1,220.82
4. What is the value of a Wallt Incorporated 5 year zero coupon bond (FV Rs.1000) if the
required rate of return is 9% and a similar AA-rated Paychex Incorporated bond pays a 10%
coupon?
A. Rs.649.93
B. Rs.670.37
C. Rs.665.37
D. Rs.679.37
5. An investor has a cash of Rs.10,000,000 at disposal. He wants to invest in a bond with
Rs.1,000 Face value. The number of bonds that he will buy if dirty price is equal to 107.457%. is:
A. 9,406.048
 B. 9,106.048
C. 9,206.048
D. 9,306.048

Exercise 2
Case let:
Valuation of shares is the process of knowing the value of companys shares. Share valuation is
done based on quantitative techniques and share value will vary depending on the market
demand and supply.
The share price of the listed companies which are traded publicly can be known easily. But w.r.t
private companies whose shares are not publicly traded, valuation of shares is really important
and challenging.
Sometimes, even publicly traded shares have to be valued because the market quotation may
not show the true picture or large blocks of shares are under transfer etc.
Security Analysts are forecasting that AI Pharma Ltd will experience three years of Super high
growth of 40% in earnings and dividends before settling down to a normal growth rate of 20% in
year 4 and beyond. Current year’s dividend per share was Rs.50.00. The cost of capital is 25%.

Based on the above data answer the following questions

1. Determine the Stage 1: Super Growth price of AI pharam’s common stock :

A. Rs.188.97
B. Rs.150.51
C. Rs.160.66
D. Rs.168.60
2. Determine the Stage 2: Constant Growth price of AI pharam’s common stock :
A. Rs.1719.77
B. Rs.1685.91
C. Rs.1608.10
D. Rs.1718.60
3. What is the dividend for year 4, the year of constant growth:
A. ₹156.00
B. ₹137.20
C. ₹164.64
D. ₹150.64
4. To determine the Stage 2, Constant Growth price of AI pharam’s common stock, the
discounting factor applicable is:
 A. 0.5120
B. 0.6400
C. 0.8696
D. 0.7561
5. Determine the Intrinsic value of AI pharam’s Equity Share:
A. Rs.1508.10
B. Rs.1618.60
C. Rs.1658.40
D. Rs.1874.88

Exercise 3
Case let:
When a new company is incorporated, it requires the capital for which it issues the shares. The
face value is the initial cost of the share fixed by the company. Face Value never changes. The
market value of stock however increases or decreases based on company’s performance and
demand & supply of the share. Market Value usually never goes below Face Value. The
difference between what shareholders pay for a share and the face value is referred to as
additional paid-in capital or premium. Determine the value of Equity per Share from the
following details:

1. Dividends per share for current year is Rs.2.18.Expected Growth Rate in Earnings and
Dividends is 3%,Cost of Equity is 8.30%
A. Rs. 40.37
B. Rs. 42.37
C. Rs. 32.37
D. Rs. 45.37
2. Find the price for a stock given that the next dividend is Rs.4.45 per share, the required
return is 19.6%, and the growth rate in dividends is 9.3% per year.
A. Rs.30.62
B. Rs.34.5
C. Rs.38.21
D. Rs.43.20
3. Top Gun Corp. will pay a Rs.3 dividend every year in one year. If investors expect that
dividend to remain constant forever, and they require a 10% return on Top Gun stock, what is
the stock worth?
A. Rs.33.30
B. Rs.3.00
C. Rs.30.00
D. Rs.31.33
4. Let us assume the face value of the preference share is Rs.500 and the stated dividend rate is
12%. The shares are redeemable after 5 years period. Calculate the value of preference shares if
the required rate of return is 13%.
A. Rs.482
B. Rs.408
C. Rs.428
D. Rs.472
5. Paid dividend is ₹ 20 and current price is ₹ 50 then dividend yield will be
A. 40%
B. ₹ 40
C. ₹. 70
D. 250%

Exercise 4
MCQs:
1.Smith Ltd has issued a five-year bond with a coupon rate of 8% and a face value of ₹ 5,000. As
a personal investor, you require a rate of return of 10%. What is the value of the bond?
A. ₹ 5,000
B. ₹ 5,399
C. ₹ 4,620
D. ₹ 4,810
2. When the coupon rate is above the discount rate, the bond value is _____ the face value and is
considered to be at a _____.
 A. Above; discount
B. Below; discount
C. Below; premium
D. Above; premium
3. A bond's duration is higher when
A. The coupon rate is higher
B. The coupon rate is lower
C. Yield to maturity is higher
D. None of the above
4. What's the value to you of a ₹1,000 face-value bond with an 8% coupon rate when your
required rate of return is 15 percent?
A. More than its face value.
B. Less than its face value.
C. Same as its Face Value.
D. None of the above
5. If the intrinsic value of a stock is greater than its market value, which of the following is a
reasonable conclusion?
A. The stock has a low level of risk.
B. The stock offers a high dividend payout ratio.
C. The market is undervaluing the stock.
D. The market is overvaluing the stock.
6. When the market's required rate of return for a particular bond is much less than its coupon
rate, the bond is selling at:
A. a premium.
B. a discount.
C. cannot be determined without more information.
D. face value
7. If an investor may have to sell a bond prior to maturity and interest rates have risen since the
bond was purchased, the investor is exposed to
A. the coupon effect.
B. interest rate risk.
C. a perpetuity.
D. an indefinite maturity.
8. Virgo Airlines will pay a ₹ 4 dividend next year on its common stock, which is currently selling
at ₹ 100 per share. What is the market's required return on this investment if the dividend is
expected to grow at 5% forever?
A. 4 percent.
 B. 5 percent.
C. 7 percent.
D. 9 percent.
9. Interest rates and bond prices
A. move in the same direction.
B. move in opposite directions.
C. sometimes move in the same direction, sometimes in opposite directions.
D. have no relationship with each other (i.e., they are independent).
10. In the formula Ve = (D1/r-g), what does g represent?
A. the expected price appreciation yield from a common stock.
B. the expected dividend yield from a common stock.
C. the dividend yield from a preferred stock.
D. the interest payment from a bond.
11. The expected rate of return on a bond if bought at its current market price and held to
maturity.
A. yield to maturity
B. current yield
C. coupon yield
D. capital gains yield
12.What is the intrinsic value of a ₹1,000 face value, 8% coupon paying perpetual bond if an
investor's required rate of return is 6%? (Assume annual interest payments and discounting.)
A. ₹ 1,333.33
B. ₹1,000.00
C. ₹ 750.00
D. ₹ 1250.50
13.Which of the following describes a bear market?
A. Investors are in a selling mode of operation.
B. Buyers are in a holding pattern.
C. Buyers are indifferent.
D. Investors are in a buying mode of operation
14.The value of a bond and debenture is
A. Present value of interest payments it gets
B. Present value of contractual payments it gets till maturity
C. Present value of redemption amount
D. None of the above
15. Required rate of return>Coupon rate, the bond will be valued at
A. Premium
B. Par value
 C. Discount
D. None of the above.
16. If the coupon rate is constant, the value of bond when close to maturity will be
A. Issued value
B. Par value
C. Redemption value
D. All of the above
17.A bond is said to be issued at premium when
A. Coupon rate>Required returns
B. Coupon rate=Required returns
C. Coupon rate
D. None of the above
18.Duration:
A. enables direct comparison between bond issues with different levels of risk

B. assesses the time element of bonds in terms of both coupon and time to
maturity
C. allows the structuring of a portfolio to take advantage of changes in credit
quality
D. enables direct comparison between bond issues with different levels of risk
19.Another term for bond duration is:
A. actual maturity
B. effective maturity
C. calculated maturity
D. near-term maturity
20.The duration of a zero-coupon bond is:
A. equal to the bond's maturity in years divided by its yield to maturity
B. equal to the bond's maturity in years
C. equal to one-half the bond's maturity in years
D. longer than the bond's maturity in years

Score Board (Self-Assessment)

COMPONENT STUDENT
SCORE
1.Caselets 3 with 5 MCQs Each 30
(15 x 2 = 30 Marks)
2.MCQs (20 x 1 = 20 Marks) 20

Total (50 Marks) 50