The valuation of securities (part b)

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  1. Avatar of acnca acnca says:
    May 4, 2013 at 8:21 pm

    My Qn is on past exam paper dec 2007 Qn 1b(i).Using the approach that you used on this video lecture i would not agree with answer given by examiner(Market value of each convertible bond = (9 x 4·100) + (122 x 0·713) = $123·89)
    This is wrong because the nominal value is not 9% but 100
    I am right to calculate it:
    100*4.1=410
    100*0.713=71.3
    market value gives 410+71.3=481.3 compared to 121.98

  2. Avatar of usman123usi usman123usi says:
    April 20, 2013 at 9:00 am

    Hi john ,
    can you please tell what if the dividend growth rate is abnormal in the early years and then after it becomes with a constant rate of growth , how to calculate the ex.div price in this case .
    thanks

    • Avatar of johnmoffat johnmoffat says:
      April 20, 2013 at 9:44 am

      The market value is the present value of the future expected dividends discounted at the shareholders required rate of return.
      So for the years where the dividend is ‘abnormal’, these dividends will have to be discounted individually. Once is becomes a constant rate of grown you can use the dividend growth formula, but since the constant growth starts ‘late’ (lets say it starts in 3 years time instead of in 1 years time) you then have to discount the answer by the extra years (in this case an extra 2 years).

      (Although you could be required to do this, it is much less likely – simply because shareholders are usually unlikely to expect precise future dividends – they are more likely to be expecting average growth – be it 1% a year or 10% a year or whatever, in which case we do not have the problem above.)

  3. Avatar of sam420 sam420 says:
    April 15, 2013 at 11:00 am

    Dear Jhon,
    Two companies A and B have same default risk.
    1) An investment (lending money) for one year to company A and a debenture for 10 year to company B, should the investor require higher rate of return from company B since investing in B means giving up opportunity to invest elsewhere after one year if a better opportunity arises. I do know debentures are traded but are not as liquid as 1 year loan.
    2) Principal amount is returned without adjusting it for inflation. If debentures are not convertible or investors do not expect to profit from conversion from debt to ordinary stock, there is a massive difference between the actual value of principal amount. Suppose inflation is constant at 5% after one year when Company A returns the nominal principal of 100 it will value 95 but when the company B returns the principal it will value at 60. Are investors not supposed to require additional return i.e. market return +premium for the lost of value in currency.
    3) With time default risk increases, even if year to year default risk between two companies are constant but with since company B is paying after 10 years it has more default risk, should investor not require higher return to compensate for this as well?

    • Avatar of johnmoffat johnmoffat says:
      April 15, 2013 at 5:10 pm

      Remember one general thing – it is not one single investor who will determine the returns required, but investors in general. One single investor simply has to decide whether the return is good enough for him/her and therefore whether or not they are prepared to invest.

      All of the factors you mention will have a bearing on the return that investors will require – certainly the time to repayment; certainly the riskiness of the companies (even though your A and B supposedly have the same default risk); certainly the general interest rates (which are likely to tie in to a degree with the expected rate of inflation).

      (I am not sure why you say the debentures are not as liquid as a loan – an investor can sell the debentures on the stock exchange at any time they want, whereas with a one year loan they have no choice (they cannot get their money back sooner, nor can they (normally) extend the loan at the same interest rate).

  4. Avatar of kayez1234 kayez1234 says:
    April 1, 2012 at 4:09 pm

    Thanks so much OT, this is so clear. Happy for such a lecture as I am doing self study. Thanks a billion!!!

  5. Avatar of Saad Bin Aziz Saad Bin Aziz says:
    December 4, 2011 at 12:09 pm

    yup:-)

  6. Avatar of estherpang87 estherpang87 says:
    November 23, 2011 at 4:54 pm

    I heard it too..HAHA

  7. Avatar of admin admin says:
    November 23, 2011 at 2:47 pm

    :)

  8. Avatar of asadraza asadraza says:
    November 23, 2011 at 12:35 pm

    did he really said that or its just my ears =D

    4:20 (the examiner is a *****)

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