Case Stock And Bond Valuation

Trident University Student Name: Module 2 – Case STOCK AND BOND VALUATION FIN501 Strategic Corporate Finance Instructor: Date: Case Assignment 1. Suppose you buy a bond that will pay $1000 in ten years along with an annual coupon payment of $50 and the interest rate is 4%. Answer the following questions: A. What is the value of this bond? Coupon rate = coupon payment/par value = 50/1000 = 5% In Excel the value is PV (rate, nper, pmt, fv) PV, (4%, 10, 50, 1000) = $ 1,081.11 B. Now suppose the bond has no coupon payments (it is a “zero coupon” bond) but still pays $1000 in ten years. What is the value of this bond? Face Value at Maturity/ (1+ Interest Rate on Bond) ^ 10 1,000/ (1.04) ^10 = $ 675.56 This is the same as PV, (4%, 10, 0, 1000) = $ 675.56 C. What would happen to the value of the bond if the inflation rate unexpectedly goes up? What the bond value increase or decrease? When inflation or the general price levels for goods and services rise, Central Banks such as the Fed raise the short term interest rate and the long term interest rates rises, and the bond value decreases (Brigham, et al., 2016) D. Now suppose the bond still pays an annual coupon of $50 but the interest rate drops to 2%. What is the new value of this bond? PV, (2%, 10, 50, 1000) = $1,269.48 The value of the bond is now $ 1,269.48 when the interest rate drops from 4% to 2% and there are annual coupon payments 2. The XYZ Corporation pays a dividend of $1 for each share and its required rate of return is 8%. Answer the following questions: A. Assuming zero growth in dividends, what is the value of each share? Value of Stock= Expected Divided per Share ÷ (Cost of Capital Equity- Dividend Growth Rate) Value of Stock= D ÷ (r-g) = $1/ 8%= $12.50 B. Now assume a 4% annual growth rate in the dividend paid. What is the value of each share? Value of Stock= D ÷ (r-g) = $1/ (8%-4%) = $25 C. Assume the growth rate is still 4%, but the required rate of return drops to 6%. What is the new value of each share? Value of Stock= D ÷ (r-g) = $1/ (6%-4%)= $50 3. Acme Medical Corp. is expecting the cash flows from 2018-2022 in the table below. After 2022 it is expecting growth in cash flow at an annual rate of 3%. The firm has determined that its weighted average cost of capital (discount rate) is 7%. Using the table below calculate the following: Year Cash flow 2018 500,000 2019 550,000 2020 620,000 2021 700,000 2022 800,000 A. What is the present value of Acme’s future cash flows using the discounted cash flow model? Discounted Cash Flow Valuation Method =Annual future cash flows, discounted to a present value + Future residual value discounted to a present value Year Cash flow PVIF Value 2018 500,000 0.93458 467,289.72 2019 550,000 0.87344 480,391.30 2020 620,000 0.81630 506,104.68 2021 700,000 0.76290 534,026.65 2022 800,000 0.71299 570,388.94 Residual Value 824,000     20,600,000 0.71299 14,687,515.30 Value     17,245,716.59 ...