Financial Management
Word document of 700 words with attached Excel Spreadsheet showing
calculations
After engaging in a dialogue with your colleagues on valuation, you will
now be given an opportunity to apply principles that were presented in this
phase. Using a Web site that provides current stock and bond pricing and yield
information, complete and analyze the tables illustrated below. Your mentor
suggests using a Web site similar tothis one.
To fill out
the first table, you will need to select 3 bonds with maturities between 10 and
20 years with bond ratings of “A to AAA,” “B to BBB” and
“C to CC” (you may want to use bond screener at the Web site linked
above). All of these bonds will have these values (future values) of $1,000.
You will need to use a coupon rate of the bond times the face value to
calculate the annual coupon payment. You should subtract the maturity date from
the current year to determine the time to maturity. The Web site should provide
you with the yield to maturity and the current quote for the bond. (Be sure to
multiply the bond quote by 10 to get the current market value.) You will then
need to indicate whether the bond is currently trading at a discount, premium,
or par.
|
Bond |
Company/ Rating |
Face Value (FV) |
Coupon Rate |
Annual Payment (PMT) |
Time-to Maturity (NPER) |
Yield-to-Maturity (RATE) |
Market Value (Quote) |
Discount, Premium, Par |
|
A-Rated |
$1,000 |
|||||||
|
B-Rated |
$1,000 |
|||||||
|
C-Rated |
$1,000 |
·
Explain the
relationship observed between ratings and yield to maturity.
·
Explain why the
coupon rate and the yield to maturity determine why the bonds would trade at a
discount, premium, or par.
·
Based on the
material you learn in this Phase, what would you expect to happen to the yield
to maturity and market value of the bonds if the time to maturity was increased
or decreased by 5 years?
In this step, you have been asked to visit a credible Web site that
provides detailed information on publicly traded stocks and select 1 that has
at least a 5-year history of paying dividends and 2 of its closest competitors.
To fill up
the first table, you will need to gather information needed to calculate the
required rate of return for each of the 3 stocks. You will need the risk-free
rate that you used in Phase 3, the market return is calculated in Phase 1, and
the beta that you should be able to find on the Web site.
|
Company |
5-year Risk-Free Rate of Return |
Beta (?) |
5-Year Return on Top 500 Stocks |
Required Rate of Return (CAPM) |
To complete
the next table, you will need the most recent dividends paid over the past year
for each stock, expected growth rate for the stocks, and the required rate of
return you calculated in the previous table. You will also need to compare your
results with the current value of each stock and determine whether the model
suggests that they are over- or underpriced.
|
Company |
Current Dividend |
Projected Growth Rate (next year) |
Required Rate of Return (CAPM) |
Estimated Stock Price (Gordon Model) |
Current Stock Price |
Over/Under Priced |
In the third
table, you will be using the price to earnings ratio (P/E) along with the
average expected earnings per share provided by the Web site. You will also
need to compare your results with the current value of each stock to determine
whether or not the model suggests that the stocks are over- or underpriced.
|
Company |
Estimated Earning (next year) |
P/E Ratio |
Estimated Stock Price (P/E) |
Current Stock Price |
Over/Under Priced |
After completing the 3 tables, explain your findings and why your
calculations coincide with the principles related to bonds that were presented
in the Phase. Be sure to address the following:
·
Explain the
relationship observed between the required rate of return, growth rate and the
dividend paid, and the estimated value of the stock using the Gordon Model.
·
Explain the
value and weaknesses of the Gordon model.
·
Explain the how
the price-to-earnings model is used to estimate the value of the stocks.
·
Explain which of
the 2 models seemed to be the most accurate in estimating the value of the
stocks.
·
Based on the
material that you learn in this Phase, what would you expect to happen to the
value of the stock if the growth rate, dividends, required rate of return, or
the estimated earnings per share were to increase or decrease? Be sure to
explain each case separately.
Note: You can find information about the top 500 stocks atthis Web site.
