Institute of Chartered Financial Analysts of India (ICFAI) University 2006 Certification Finance Security Analysis-I - Question Paper
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0.6792
0.6792
7.97
7.47
7.00
6.57
6.16
5.77
67.92
2
6
12
20
30
42
42
15.94
44.82
84
131.4
184.5
242.34
2852.64
Total
108.86
3555.94
Convexity =
3555.94 0.8789 = 3125.32
Therefore convexity = =28.71.
Price change due to convexity = 1/2 Price Convexity (Change in Yield)2
Therefore Price change for 0.75% change in yield
= ½ 108.86 28.71 (0.0075)2
=8.79%.
b. Price of the bonds after 1 year
Bond A
= 6.64 + 6.25 + 89.71 = 102.60
One year holding period return on bond A = = 7.40%.
Bond B
= 8.07+7.59+7.13+6.69+79.83=109.31
One year holding period return = = 8.22%.
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4. The debenture will be desirable by investor if the current value of the cash flows from the debenture is greater than the problem price.
Equity Shares
To compute cash flow from the equity part of the debenture we presume EPS to be Rs. /share.
Payout ratio = 50%.
Retention ratio = 50%.
Therefore DPS = 0.50
Current growth rate 21%
Growth rate in sixth year and afterwards
= 9%. Decline in the growth rate every year
= = 2%.
Therefore dividend for every year
Year
Dividend
1.
2.
3.
4.
5.
6.
0.51.19
0.51.191.17
0.51.191.171.15
0.51.191.171.151.13
0.51.191.171.151.131.11
0.51.191.171.151.131.111.09
0.5950
0.6962
0.8006
0.9046
1.0042
1.0946
Value of stock at the end of sixth year
=
=
= 16.73
Preference shares
Value of preference shares at the end of sixth year.
=12 PVIFA (14%, 5) + 100 PVIF (14%, 5)
= 41.1972 + 51.94
= 93.1372
1st choice
Exchange Part D and warrant for 1 equity share at the end of 2nd year.
Year
Dividend
Interest
Stock/Redemption
value
Total inflow
PVIF @14%
PV of cash flow
1
2
3
4
5
6
0.5950
0.6962
0.80062
0.90462
1.00422
| Earning: Approval pending. |
