FMdec10 mock exam qn 1

It is a calculator thing

first calculate (1+g)^N
then 1/ (ANS) on calculator.

example if g=6% N= 2yrs

calculate: (1.06)^2 = 1.1236

now ; 1/ 1.1236 =0.890 is the discount factor

tks. how did u get the 6 % ?

To get g :

D1= D0(1+g)^N
make g the subject

(D1/D0) = Ans
: N-Square root of Ans

then ; 1-Ans
where D1 = is the current dividend
D0 = Oldest Dividend
N= Number of yrs
1 = Constant

Example: Current or Ex-dividend =23cent
Dividend in the last 2 yrs =20 cent
Number of yr =2yrs

Cal: 23/20= 1.15
2 Square root of 1.15 =1.0723
therefore: 1.0723-1 =0.723

g=0.723*100 =7.23%

ookie. tks man ! i jus got it . you r great man. tks a lot. ;)

hey i jus found the fastest ans to my qn.

PV = 1/(1+r)^n

r is the disc rate and n is the year (T)

so in qn 1 of mock exam we calculated wacc has 21%
use this for NPV cal for b
DF 21% eg year 2 is 1/(1.21)^2 = 0.683 and so on jus change the n accordingly.

hope ok. tks

Nice... goo work

Hi,

Im stuck on a question where I ahve to use Miller-Orr Model, has anyone else same problem when using calculator??

Check out the solution and question about Miller Orr Model on open tuition video... the question will be always put like that ....

What you need to remember is that ..
interest and variance must be computed per day ,

Variance = standard Deviation squared
ie : V= (SD)^2

that is all about MOM ... the formula is given in the exams except computing the upper limit ... you can get the info on the Open tuition video on MOM

Thanks v much, thats been a great help!! Cheers!

You are welcome .................. all the best to us all this Thursday ....

Hi,

In the same question 1, do we assuming that the bonds are being redeemed at a premium to calculate the 'Kd' ? .. If they mentioned it in the question i don't think i see it :(

When computing for bond you must know that the current bond is used in computing the Market Value;

That is Market Value = current value
Bond face value( $100)

you only calculate the future value when the you are ask to find Kd
Note : that Finance Company would always choose the best of the two .that is if future value (FV) is greater that $100 bond ..then they would use that and add the interest (IA) (interest * annuity factor) would give you the future value.....

the premium is the difference between the FV (that is FV +IA) less ($100 +AI)

note that the FV and $100 must be discounted .

Example:
A 2 Million bond at 9% ( nominal value of $100) has a current market value of $105 . in 7 yr time the the company would issue the bond out for 40 share per $100 bond .

NB current share prices is $5.6 per share growing at 5% per annum .

calculate the :
1 . Market value of the bond.
2. the future value per bond
3. Premium per bond issued .
Solution
1. Market value
= 2m *105/100
=2100

2. Future Value
= (5.6 *1.05) ^7 = 7.88 (share price in 7yrs)
= 40 * 7.88
=$315.2 @ discount of 0.547 (9% for 7yrs) = $172.41
interest on bond = 9* 5.033 = 45.297
Future value per bond is = 172.41 + 45.30 =217.71

3. Premium per bond.
= FV per bond less Nominal value per bond

so Nominal value (floor value) ( $100 * 0.547) + (9 *5.033) =99.997
:.
= 217.71 -99.997 = $117.71

Premium = $117.71