750 words
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 by protectedsurf”> 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 to calculate the
risk-free rate for this assignment. You will need the market return that was
calculated in Phase 2, 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 by protectedsurf”> 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.
References
S&P 500 index chart. (2014). Retrieved from
the Yahoo! Finance Web site:http://finance.yahoo.com/echarts?s=%5egspc+interactive#symbol=^gspc;range=1y;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=;
Yahoo! Finance. (n.d.). Retrieved
fromhttp://finance.yahoo.com/
Be sure to document your
paper with in-text citations, credible sources, and a list of references used
in proper APA format.
