Financial Management (MGT201)
GDB#01 Marks: 5
Discussion Topic: Valuation of long-term securities
Intrinsic value of log term securities plays a significant role to guides the investor whether to buy a particular security or not by comparing it with market price. Based on fundamentals, the intrinsic value depicts the true value of the securities. Along with other factors affecting investment decisions, intrinsic value acts as a supporting factor for a rational decision. Moreover, investor’s behavior towards risk is also a critical factor in selection of type of the security for the investment purpose.
Suppose you have to invest in the stock market where you have option of bonds and stocks. Considering your risk type as investor (risk averse or risk taker) you are required to select appropriate investment option for yourself. Along with risk factor, your decision should be based on intrinsic value of the securities.
Option 1: A 10-year coupon bond with Rs. 1,000 face value which is paying 15% coupon whereas the required rate of return for such securities is 18% p.a. currently the bond is selling at Rs. 800.
Option 2: Stocks of ABC company issued at face value of Rs. 100 per share. The dividend has recently paid a dividend of Rs. 5 per share which grows at 10% annually. The shares of the company are currently selling at Rs. 125 per share whereas, the required rate is 15%.
Required:
- Declare your risk behavior i.e. either you are a risk taker investor or risk averse investor. It is mandatory because next two answers are based on this selection.
- Calculate intrinsic value of the security based on your risk behavior.
- Based on intrinsic value and risk behavior, whether it will be a feasible decision to buy your selected security? Why or why not? Provide reason for your decision.
NOTE: Formulas and calculations are mandatory for intrinsic value calculations, no marks will be given for providing answers without working. Do not paste formula and working images.
Important Instructions:
- Your discussion must be based on logical facts.
- The GDB will open and close at the above specified date and time. Please note that no grace day or extra time will be given for posting comments on GDB.
- Use the font style “Times New Roman” and font size “12”.
- Your answer should be relevant to the topic i.e., clear, and concise.
- Do not copy or exchange your answers with other students. Two identical / copied comments will be marked Zero (0) and may damage your grade in the course.
- Books, websites, and other reading material may be consulted before posting your comments; but copying or reproducing the text from books, websites and other reading materials is strictly prohibited. Such comments will be marked as Zero (0) even if you provide references.
- You should post your answer on the Graded Discussion Board (GDB), not on the Moderated Discussion Board (MDB). Both will run parallel to each other during the time specified above. Therefore, due care will be needed.
- Obnoxious or ignoble answers should be strictly avoided.
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- Questions / queries related to the content of the GDB, which may be posted by the students on MDB or via e-mail, will not be replied to till the due date of GDB is over.
- For planning your semester activities in an organized manner, you are advised to view schedule of upcoming Assignments, Quizzes and GDBs in the overview tab of the course website on VU-LMS.
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