Question

No. 1

PT Cerah Ceria issued a three-year 4,25% annual coupon bond with the maturity value Rp 1.000.000.000,-. The following table reports the yield rates as follows:

Maturity	Per Rate	Spot Rate	Forward Type	Forward Rate
1	2,5000%	2,5000%	0 years form now	2,5000%
2	3,0000%	3,0080%	1 years from now	3,5180%
3	3,5000%	3,5240%	2 years from now	4,5640%

Suppose that PT Cerah Ceria has a special right to settle the bond before the maturity date.

Estimate the Bond value (considering the special right) from PT Cerah Ceria!

No.2

Last year, Buch Gmbh, a German firm, paid a dividend of EUR 3,30 per year. The current stock price of the firm is EUR 194,98. An analyst documents that the current required return on equity for the firm is 9 percent and dividends are expected to grow at 14 percent for the next two years, 12 percent for the following five years, and 6,75 percent thereafter.

Evaluate the firm's current stock price!

No. 3

PT Cinta Flora is a firm specializing in developing Bonsai. The firm has three choices regarding when they will harvest and able to sell the Bonsai in the next 5 years, 10 years or 15 years. The firm started its Bonsai's development on January 1, 2020. The firm has 1 hectare area for its Bonsai. The firm's marketing department has surveyed the Bonsai's market price and estimate the following expected selling price:

Bonsai quality	Price per Bonsa
Diamond	20.000.000
Gold	5.000.000
Standard	1.000.000

The Bonsai's price increases below the inflation rate. According to the local government statistical data, the inflation rate is expected to be 5 percent per year. An actuary believes that 2 percent per year is an appropriate growth rate below the inflation rate. PT Cinta Flora executives are considering when to harvest the Bonsai. They have possible scenarios below:

Time to Harvest	Harvest Unit Of Bonsai	Bonsai Quality (diamond)	Bonsai Quality (gold)	Bonsai Quality (standard)
1 Jan 2025	800	10%	20%	70%
1 Jan 2030	900	10%	40%	50%
1 Jan 2035	900	15%	35%	50%

The firm's operational manager expects that there would be 10 percent losses of every Bonsai at every quality due to incidental damage. The entire cost of harvesting is expected to be Rp 80.000,- per Bonsai. Sales and administrative expenses (fully paid in cash) are expected to be Rp 60.000,- per Bonsai. Regrettably, the 10 percent losses of harvested Bonsai still incur operational expenses because the damaged Bonsai shall be carefully and properly cleared. The firm's executives budget the operational costs to increase at the inflation rate. The operational costs are as follows:

Operational	Cost per 1.000 square meter
Razing	20.000.000
Watering	25.000.000
Monitoring	60.000.000
Fertilizer	10.000.000

All cash flows are assumed to occur during the harvest year. The firm's executives estimate that the nominal required return rate is 12 percent, and the tax rate of 25 percent.

Required:

When should PT Cinta Flora harvest the Bonsai? Your analysis MUST include NPV calculations, as well as the necessary assumptions and brief explanation.

Answer 1

(1)Value of bond using spot rate=PV of CF(coupon) frpm 0 to n years + PV of FV on the n^th year

for our bond coupon= 4.25% of 1000,000,000

=42,500,000

FV=1,000,000,000

also given spot rate for year 1 (S₁₎=2.5%

S_2=3.008%

S₃=3.5240%

So value of bond=coupons/(1+spot rate)ⁿ + FV/(1+Spot rate)ⁿ

  =

=

=1021138988

THUS PRICE OF BOND IS 1021138988.

TO Calculate the bond from forward rate=

PT cerah ceria has the right to settle the bond before maturity.this is called callable bond

P_CB= P_NCB - C₀

Where P_CB= Price of callable bond

P_NCB= Price of non callable bond

C₀= value of call option.

(2) This question requires the use of 3 stage DDM:

We have D₀=3.30 i.e previous year dividend

and the following growth rates

dividend growth rate	time
14%	2 years
12%	5 years
6.75%	forever

now calculation of dividend

time	dividend	amount	PV of dividend @9%
1	3.3*1.14	3.7620	3.4514
2	3.3*(1.14)2	4.2887	3.6097
3	3.3*(1.14)2*1.12	4.8033	3.7090
4	3.3*(1.14)2*(1.12)2	5.3797	3.8111
5	3.3*(1.14)2*(1.12)3	6.0253	3.9160
6	3.3*(1.14)2(1.12)4	6.7483	4.0238
7	3.3*(1.14)2(1.12)5	7.5581	4.1345

terminal value=D_n+1/Re-g

=4.1345*1.0675/0.09-0.0675

=196.1591

PV of terminal value at 9%=196.1591/(1.09)⁷

^{= 107.3057}

So current stock price = PV of dividends +PV of terminal value

= 3.4514+3.6097+3.7090+3.8111+3.9160+4.0238+4.1345+107.3057

= 133.9612.

THUS CURRENT STOCK PRICE IS 133.9612.