shareholder, APR & EAR, bond & stock valuation

image illustration: quick action, quick answer & quick way to exam hall

1. In your opinion, would maximizing shareholder value be in conflict with avoiding unethical behaviour?

answer: 

 

No, in my opinion it is need to have “regulation”, example – disclosure all relevant information by corporation to shareholder and potential shareholder will put all shareholders on a level information playing field and thereby to reduce unethical behavior. There are two classes of goals of firms:

First goal relate to profitability: involving sales, market share and cost of control.

Second goal: involving bankruptcy avoidance, stability and safety.

Therefore; maximizing shareholder value and avoiding unethical behavior are two things for the firm in achieving of its goals.

2. Would you be willing to pay RM25,000 today in exchange for RM100,000 in 20 years? What are the key considerations to your answer?

Answer: 

The key considerations:

The interest rate;

Compounding periods;  for example – daily, monthly, quarterly, semiannually, yearly.

3. What's the difference between APR and EAR?

Answer:

APR (Annual Percentage Rate):

APR become meaningful only if the compounding interval is given. For example – for APR 10%, the FV at the end of one year with semiannual compounding is (1+(0.10/2))² = 1.1025. The FV with quarterly compounding is (1+(0.10/4))⁴ = 1.1038. if the APR is 10% but no compounding interval is given, we cannot calculate future value.

APR is the periodic rate X by the number of periods per year.

APR can be converted to EAR by formula: (1 + r / m) ^m – 1

APR With regards to credit cards, this means the amount of interest that must be paid on the money have borrowed on credit. When choosing a credit card, one important factor is the rate of APR.

EAR (Effective Annual Rate):

EAR is meaningful without compounding interval. For example – an EAR of 10.25% means that a $1 investment will be worth $1.1025 in one year. 

EAR is the annual rate of interest actually being earned.

EAR used when we borrow money. It predicts the amount of money we will owe in the future, so the higher the figure, the more we will pay. 

4. Give the relationship of : coupon rate; YTM; and price of a bond.

Answer:

C = coupons, regular interest payments, example $80

R = interest rate, Yield To Maturity (YTM), example 8%, 10% and 6%

Bond price = PV of the coupons + PV of the par value

When C = R, price = par value, example C = $80, coupon rate = 8%, R=8%, price = $1,000,-, par value = $1,000, coupon = $80,-.

The relationship: with an $80 coupon, this bond pays exactly 8% interest only when it sells for $1,000,-

When C>R, price > par value (premium bond), example: C = $80, coupon rate = 8%, R = 6%, price = $1,136.03, par value = $1,000,-

When C < R, price < par value (discount bond), example: C = $80, coupon rate = 8%, R=10%, price = $885, par value = $1000,-

5. Explain what determines the price of a share of stock? 

Answer:

The discounted present value of the sum of next period’s dividend plus next period’s stock price.

P₀ = (Div₁/ 1+R) +( P₁/1+R)

The discounted present value of all future dividend.

P₀ = ( Div₁/ 1+R) + (Div₂/ (1+R)²) + (Div₃/ (1+R)³) + ……