this document includes 2nd year information on how to value preference shares and debentures. I use these notes to help me step by step on how to attempt questions as well as the theory.
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Information:
12% debentures were issued on 1 October 2008 at a nominal value of R100 per debenture. The nominal value will be
repaid in 2 installments to the debenture holders.
The 1st redemption (70% of the nominal value) will take place on 30 Sept 2018.
The 2nd redemption (30% of the nominal value) on the 30 sep 2020
Coupon payments are made twice a year (end of Sep and march)
The current rate of return on long term government bonds ( with coupon payment twice per annum) is currently 8%
(nominal).
The required rate of return is 20% higher as compared to government bonds
1-Oct-
08 1-Oct-11 30-Sep-18 30-Sep-20
TODAYS 30%
issued DATE 70% redemption redemption
7 years 2 years
( payments are ( payments are
Nominal made twice per made twice
value in SFP= year, 7 x 2 = 14 per year, 2 x 2
15 000 000 payments redemption A = 4 payments Redemption B
Start with your first redemption : redemption A (70%)
FV 70% x 15 00 000 -R10 500 000
PMT= nom value x coupon rate (remember BOTH FV and PMT = - sign
15 000 000 x 12%/2 -900 000 (remember the coupon rate is divided by 2
because 2 payments were made per year
N 2 x7 14
i 8% x 1.2 9.60%
p/yr 2
therefore the PV on 1 Oct 2011 R14 470 470. 82
NOW: for your 2nd redemption of 30% (redemption B)
FV= 30% x 15 000 0000 -4 500 000
PMT= 4 500 000 x 12%/2 -270 000
N= 2 x2 4
I 9.60%
p/yr 2
therefore PV ON 30 Sept 2018 4 692 374.27
, BUT remember that 2nd redemption still has to go back 7 years to
TODAY
FV PV on 30 Sept 2018 -4 692 374.27
PMT 0 we are not making any payments BECAUSE we
already accounted for these payments in the
calculation for redemption A
p/yr 2
N 14
I 9.60%
therefore the PV on 1 oct 2011 2 434 079.10
the total present value for TODAY
14 470 470.82 + 2 434 079.10
PV= 19 904 549.93
, REDEEMABLE PREFERENCE SHARES WITH DIVIDENDS IN ARREARS
Information:
The 9% redeemable preference shares were issue on 1 Oct 2010 at a nominal value of R200 each.
The preference shares will be redeemed on the 30 sep 2018 at a premium of 15% on the nominal value
Dividend payments occur annually on 30 sept. preference dividends have not been paid for 2011 and the expectation is
that these dividends in arrears will be paid on 30 Sep 2012 and then will not become overdue after
Required rate = 11%
1-Oct-11 30-Sep-18
TODAYS DATE 70% redemption
Dividends in ARREARS
shares are currently trading @ R12 in the only until 30 Sep 2012
market = 1 year REDEEM
RDEMPTION
FV 200 x 1.15 -R230 (the 1.15 is the premium)
BUT remember if it was 2 payments per
PMT 200 x 9% -18 year then the 9%/2
N 7
p/yr 1
i 11%
therefore PV of 1
share R195.60
DIVIDENDS IN ARREARS
fv 200 x 9% -18
PMt 0
p/yr 1
n 1 ( the dividends are in arrears for 1 year)
i 11%
therefore PV 16.22
SO the PV of 1 redeemable preference shares
16.22 + 195.60
R211.82
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