Question

Mr. Sudarshan has inherited the following securities:

1. 100 bonds - 11% bonds of Rs.100 each, maturing after 5 years at par
2. 100 bonds- 13% bonds of Rs.100 each, maturing at par after 4 years
3. 200 Equity shares of XYZ Ltd., face value Rs.100 XYZ Ltd.

Pays a dividend of 20% on equity shares and the dividend rate is expected to remain the same. Mr. Sudarshan would like to know the total value of the inherited securities. He considers a discount rate of 12% for bonds and 15% for equity appropriate.

Answer 1

Answer : Calculation of Total Value of Inherited Securities :

First calculate the value of 100 bonds 11% bonds of Rs.100 each, maturing after 5 years at par :

Price of Bond = [Coupon * PVAF @YTM for n years] + [Face Value * PVF @YTM for nth year]

here YTM % = 12%

n is the number of years to maturity i.e 5 years

Coupon = 1000 * 11% = 110

Price of Bond = [110 * PVAF @12% for 5 years] + [1000 * PVF @12% for 5th year]

= [110 * 3.60477620228] + [1000 * 0.5674268557]

= 396.52538225 + 567.4268557

= 963.95223795 or 963.95

Total Value = 100 * 963.9522 = 96395.22

Then calculate the value of 100 bonds 13% bonds of Rs.100 each, maturing at par after 4 years:

Price of Bond = [Coupon * PVAF @YTM for n years] + [Face Value * PVF @YTM for nth year]

here YTM % = 12%

n is the number of years to maturity i.e 4 years

Coupon = 1000 * 13% = 130

Price of Bond = [130 * PVAF @12% for 4 years] + [1000 * PVF @12% for 4th year]

= [130 * 3.03734934658] + [1000 * 0.63551807839 ]

= 394.855415055 + 635.51807839

= 1030.37349344

Total Value = 100 * 1030.3735 = 103037.35

3.) Value of Equity shares = Dividend / Discount rate for equity

= (100 * 20%) / 0.15

= 133.33

Total value = 200 * 133.33 = 26666.67

Total Value of Inherited security Today = 96395.22 + 103037.35 + 26666.67 = 226,099.24