The ARA Corporation bonds have a coupon of 14%, pay interest semi-annually, and they will mature in 7 years. Your required rate of return for such an investment is 10% annually. i) How much should you pay for a $1,000 ARA Corporation bond? ii) If you are given RM90,000, how many units of bond can you purchase? iii) What is the yearly interest income for this bond if I purchase it with RM90,000?
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
The ARA Corporation bonds have a coupon of 14%, pay interest semi-annually,
and they will mature in 7 years. Your required
is 10% annually.
i) How much should you pay for a $1,000 ARA Corporation bond?
ii) If you are given RM90,000, how many units of bond can you purchase?
iii) What is the yearly interest income for this bond if I purchase it with RM90,000?
iv) You plan to reinvest the coupon interest at 12% rate of return per annum. Calculate the value of the reinvestment, what is the figure will you get at the end of 7th years with your principle
2) Find the duration of the bond with the given information.
Face value = RM1000
Maturity = 6 years
Coupon = 5%
Bond value = RM1020
3) Recent dividend distributed RM1. Suppose a firm is expected to increase dividends by 20% in one year and by 15% in two years. After that, dividends will increase at a rate of 5% per year indefinitely. If the required return is 20%, calculate the stock.
4) Capital Bhd. just paid a dividend of RM2.00 per share on its stock. The dividends are expected to grow at a constant 6 percent per year indefinitely. If investors require a 13 percent return on Capital stock, calculate;
i) The current stock price
ii) The stock price in 3 years
iii) The stock price in 15 years
5.The JLK Corporation is considering an investment that will cost RM80,000 and have a useful life of 4 years. During the first 2 years, the net incremental after-tax cash flows are RM25,000 per year and for the last two years they are RM20,000 per year. Calculate the payback period for this investment.
Calculate the following project, at cost of capital of 10%.
| Years | Cash flow (RM) |
| 0 | -10,000 |
| 1 | 2,000 |
| 2 | 2,000 |
| 3 | 4,000 |
| 4 | 4,000 |
| 5 | 5,000 |
i) NPV
ii) PI
iii) Justified should we accept or reject the project?
5.Bank ABC Berhad is considering replacing its existing computer system, which was purchased 2 years ago at a cost of RM325,000. The system can be sold today for RM200,000. It is being depreciated and 5-year recovery period. A new computer system will cost RM500,000 to purchase and install. Replacement of the computer system would not involve any change in net working capital. Assume a 40% tax rate. Calculate the following;
i) the book value of the existing computer system.
ii) the after-tax proceeds of its sale for RM200,000
iii) the initial investment associated with the replacement project.
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