FIN2002S: SAI Ltd issued a $250,000 bond at the coupon rate of 2 percent payable semi-annually. Now, the bond has a remaining life of 4 years: Principles of Finance Assignment, UCD, Singapore

Question 1

• SAI Ltd issued a $250,000 bond at the coupon rate of 2 percent payable semi-annually. Now, the bond has a remaining life of 4 years.

1. Two years from now, you bought the SAI bond when the market interest rate for a new SAI bond is 4 percent. How much did you pay for the bond? Illustrate your answer using the bond valuation equation and not using an online calculator/software.
2. You sold the bond purchased in part i. after holding it for a year when interest rates fell to 3 percent. What is the percentage gain/loss on the bond? Illustrate your answer using the bond valuation equation and not using an online calculator/software.

• The current market value of a firm’s share is $32 million, with 20 million shares outstanding. The net profit after tax is estimated to be $5 million.  Investors are willing to pay a value equivalent to 20 times of the firm’s earnings. Based on the price-earnings multiple valuation models, are the firm’s shares fairly priced? Should an investor buy the share? Explain why.

Question 2

Consider the following two mutually exclusive projects:

Whichever project you choose, if any, you require a 15 percent return on your investment.

Question 3

SS Ltd is a listed company that operates three divisions, all focused on single activities as shown in the table below.  SS Ltd identified a surrogate listed company for each of its divisions in order to calculate cut-off rates for new investments.

The company has T-bill investments, valued at $3 million, earning 2 percent. The stock market returns averaged 12 percent per year for the last ten years.