TOPIC: Time Value of Money

Risk and Rates of Return

Interest Rate, Stock and Bond Valuation

General Instructions:

Fill in the data required below;

Part I. Computational analysis

Direction: Find the missing value for each of the conditions below;

Marking Scheme: (3 marks correct Process + 2 marks correct answer)

1. Present Value = BD 90 ; Future Value = BD 110 ; r = ?

; n = 3 years (annual)

2. Present Value = BD 130 ; Future Value = BD 250 ; r = 3% ; n = ?

3. PMT = BD 100 ; i = 2% ; n = 10 ; PV_AD = ?

4. D₀ = BD 20 ; r = 12% ; g = 8% ; P₁ = ?

5. Par Value = BD 1,200 ; interest = 8% ; t = 8 ; r = 5% ; f= semi-annual ; B₀ = ?

Part II. Case Analysis

1. Shaila Sabt was offered by a jeweler the right to purchase collectors item jewelry. The jeweler wanted to purchase the said item by paying BD 100 at the end of the first period, BD 160 at the end of period 2, BD 120 at the end of period 3, and an equal payment of BD 50 each at the end of the next 4 periods.

Requirements: 20 marks

1. Lay out the cash flows involved in the offer on a time line.

2. If Shaila Sabt required a rate of return of 10%, what is the present value of this series of payments? (3 marks correct Process + 2 marks correct answer)

3. Another jeweler offers Shaila a one-time payment of BD 3,250 seven years from today. Provide a calculation to compare both offers and recommend which should Shaila accept?

2. Tony Starks has the following Investments in his portfolio

Stock	Cost	Beta	Yearly Income	Value Today
A	15,000	1.6	200	18,000
B	12,000	1.2	150	16,000
C	13,000	0.9	100	15,000

Requirements: (15 marks)

1. Calculate the portfolio beta on the basis of the value today.

2. Calculate the percentage return of each asset in the portfolio for the year.

3. Calculate the percentage return of the portfolio on the basis of original cost, using income and gains during the year.

4. Assuming that Tonys fund manager provided him a data which says that during the time when the investment was made, the market return was expected to be 15% while the risk free rate was 2.5%, what is the expected rate of return for each stock on the basis of its beta and the expectations of market and risk-free returns.

3. Compute the value of a bond that has a BD 500 par value and 10% coupon interest rate. The issue pays interest annually and has 10 years remaining to its maturity date. A bonds of similar risk are currently earning a 12% rate of return.

4. Compute the value of a stock that paid cash dividends of BD 100 per share this period and is expected to grow at 10% per year for the next 2 years, after which they are expected to grow at 12% per year to infinity at a 5 required rate of return.