CISCO Case Study: Financial Calculations

Case Study

Question one

	Coupon	Deadline	Price	yield
CISCO	8	mars 15/2023	0.75	6

a) Current Yield = Annual coupon/ current bond price

0.08 =0.0 6 / p

Price = 0.75

b) coupon rate = 8%

yield                 = 8%

price = coupon rate/ yield

        = 1

c) Actual annual yield =  [1 + (stated interest/n)]^{n – 1}

                                                   ⁼ (1 + (6 / (2/12))^2/12

                                                         = 2.8%

d) The yield achieved is different from yield promised due to the time value of money.

Question 2

year	Dividends
2017	8.00$
2016	7.81$
2015	7.47$
2014	7.02$
2013	6.54
2012	5.98$

Growth rates
Using Gordon Growth Model

Dividend Growth = Year X Dividend / (Year X - 1 Dividend) - 1

2012: Not allowed

2013:  6.54/5.98 – 1 =9.36%

2014: 7.02/6.54- 1 =7.34

2015: 7.47$/7.02 – 1 =6.41%

2016: 7.81$/7.47 – 1 =4.55%

2017: 8.00$/7.81 – 1 = 2.43%

Average growth rate = (9.36+7.34+6.41+4.55+2.43)/5

                                 =6.02%

Dividends 2018= $8.00 * 106.02%

                         = 8.48

P = D1 / (r – g)

D1 = the value of next year's dividend

r = the cost of equity capital

g = the dividend growth rate

For xyz ,

$15 = $3/ (r-0)

$15 = 3/r

15r = 3

R =20%

Thus for Telnet,

P = $8.48/ (20% - 6.02%)

    = $ 60.66

Question 3

1. I would choose project 1 since the IRR is more than the cost of capital meaning it is profitable and the NPV is higher  . Another choice is project 3 which also has the same qualities. Thus, I will just choose the two.
2. Project 1 and three both have a higher IRR compared to the cost of capital. However, if the two are mutually exclusive the best project will be project 1 since it has a better NPV.