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3. If the entire P2, 500,000 is invested in GMA7, what is the expected rate of return?
6% + (10% - 6%) 1.50 = 0.12 / 12%
4. If P1, 500,000 is invested in GMA7 and P1, 000,000 is invested in PCOR, what is the
expected rate of return?
1,500,000 / 2,500,000*1.50= 0.90
1,000,000 / 2,500,000*(0.50) = (0.20)
2,500,000 0.7x.10=.07 / 7%
*If the expected rate of inflation rate increased to 3%, the real risk-free rate remains
constant: (change in SML due to inflation)
4. What is the required rate of return on Jollivee’s stock?
8% + (12% - 8%) 1.50 = 0.14 / 14%
If the required return on the market falls to 10.5%, and all betas remain constant:
(change in SML due to behavior)
6. What is the required rate of return on Jollivee’s stock?
5% + (10.5% - 5%) 1.50 = 0.1325 / 13.25%
PROBLEM 4
Meralco has two P1,000 par value bonds outstanding. Bond #1 matures in five years
and Bond #2 matures in 15 years. Both bonds pay P80 interest annually and currently
sell at their par value. Thus, the current required rate of return is 8%.
1. Which bond should know the greater price change in response to an increase in the
required rate of return?
For Bond # 1:
(1,000 / 1.085) = 680.58
1−1.08−5
80 * = 319.42
0.08
1,000
For Bond # 2:
(1,000 / 1.0815) = 315.24
1−1.08−15
80 = 684.76
0.08
1,000
- The Bond which has greater price change in response to an increase in the required
rate of return is Bond # 2 due to a father maturity date.
2. What is the intrinsic value of each bond if the required rate of return is 9 percent?
For Bond # 1:
(1,000 / 1.095) = 649.93
1−1.09−5
80* = 311.17
0.09
961.10
For Bond # 2:
(1,000 / 1.0915) = 274.54
1−1.09−15
80* = 644.86
0.09
919.40
3. Compare the price changes in the two bonds when the required rate of return change
to 9 percent.
For Bond # 1:
1,000 – 961.10 = 38.9
1,000 – 919.40 = 80.6
PROBLEM 5
Ordinary equity share dividends of Stark Industries have been growing at an annual rate
of 10 percent. The current dividend per share is P1.20. If an investor requires a 15
percent return on the share, what is the current value of 100 shares of Stark Industries
under each of the following conditions?
a. Dividends are expected to continue growing at a constant rate of 10 percent.
D(1) = D(0) * (1 + g)
1.20(1.10) ÷0.15−0.10 = 1.32 ÷0.05 = 26.40
b. The dividend growth rate is expected to decrease to 8.5 percent and to remain
constant at that level.
1.20 ( 1.085 ) ÷ 0.15−0.085 = 1.3 0 2÷ 0.0 6 5 = 20.03 / 20
c. The dividend growth rate is expected to increase to 12.5 percent and to remain
constant at that level.
1.20(1.125) ÷0.15−0.125 = 1.3 5 ÷0.0 2 5 = 54