Time value of money is the observation that, it is better to receive money sooner than later. Explain two (2) reasons why a cedi today is worth more than a cedi sometime in the future.
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
Apel Investment Company has GH¢1,800,000 of interest-bearing bond outstanding. The
outstanding bonds have a 11% coupon and a 14% yield to maturity. Management believes
they could issue new bonds at a premium of 105% that would provide a similar yield to
maturity. Also, the company’s prepared stock currently stands at GH¢1,200,000 and trades
at GH¢60.00 per share. The company pays a dividend of GH¢3.00 per share. Furthermore,
the company’s common stock sells for GH¢15.00 per share with 200,000 shares in issue.
The company has a beta of 1.2, whiles the government’s T-Bill has an interest rate of 12%,
with a 18% average return on the market. The company’s marginal tax rate is 40%.
Management is considering investing in a new project, the details of which are as follows:
GH¢
Project cost 2,000,000.00
Estimated net profit:
Year 1 (22,000.00)
Year 2 192,000.00
Year 3 300,000.00
Year 4 270,000.00
Year 5 180,000.00
Additional information;
The estimated residual value of the project at the end of its useful life is
GH¢400,000
later. Explain two (2) reasons why a cedi today is worth more than a cedi sometime in the future.
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