FIN722 Assignment 1 Solution Fall 2015

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FIN722 Assignment 1 Fall 2015 Corporate Finance

Date date Due Date: 9-Dec-2015

Here is FIN722 Assignment # 01 for your course of corporate finance. It will provide you an opportunity to get yourself prepared for your mid-term exam. Before comprehending and attempting the assignment, we would like you to note some of the following important points.

This assignment has been designed to enhance and assess your financial knowledge so it is advisable to put your genuine efforts towards its attempt. You may, however, consult your study resources or to anyone who has requisite financial expertise but the solution should be prepared wholly and solely by you.

[alert type=”general” accent_color=”” background_color=”” border_size=”1px” icon=”fa-volume-up” box_shadow=”yes” animation_type=”0″ animation_direction=”down” animation_speed=”0.1″ class=”” id=””]Always remember that copied/cheated solutions not only earn you low marks but also spoil your knowledge. So, keep yourself at a safe distance from ready-made and substandard solutions.[/alert]

[alert type=”general” accent_color=”” background_color=”” border_size=”1px” icon=”fa-volume-up” box_shadow=”yes” animation_type=”0″ animation_direction=”down” animation_speed=”0.1″ class=”” id=””]Read the assignment question twice, thrice or even more times in order to comprehend it in its true spirit before preparing the solution. Believe it that you are capable enough to prepare the solution by yourself so just give it a try.[/alert]

FIN722 Assignment 1 Solution

CASE # 1: Smart manufactures and Style manufacturers are manufacturers of sports goods. Both companies have issued bonds, each of which has par value of Rs. 1,000. Both bond issues have similar year to maturity of 5 years. However, coupon rate offered on Smart’s bonds is 12% paid quarterly while Style’s bond is offering coupon rate of 6% quarterly.

Required:

a) Analyze which company’s bond is more sensitive to price change and why?

b) Calculate present value of each bond if market required rate of return on both bond issues is 8%.

CASE # 2:

Stemmer Limited deals in business of garments. Company has currently paid a dividend of Rs. 2 per share to its shareholders. Company has decided to pay dividend up to year 5 at growth rate of 15%. After that growth rate will decrease and company will start to pay dividend at 5%.

Required:

What will be the current value of Stemmer’ stock if investor’s required rate of return is 10%? Provide appropriate detailed working.

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