STOCK AND BOND VALUATION Assignment Overview Before starting on this assignment, make sure to thoroughly review the required background materials. This assignment will require you to use the various discounted cash flow methods and dividend models to ma

2018

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STOCK AND BOND VALUATION

Assignment Overview

Before starting on this assignment, make sure to thoroughly review the required background materials. This assignment will require you to use the various discounted cash flow methods and dividend models to make computations. In addition to knowing the computational steps involved in stock and bond valuation, make sure you also understand the basic concepts.

Submit your answers as a Word document. Make sure to show your work for all quantitative questions, and make sure to fully explain your answers using references to the background readings for any conceptual questions. Questions 1 and 3 will require Excel, so submit an Excel file that shows your computational steps as a separate file in addition to your Word file. Question 4 is purely conceptual, no computations are necessary but make sure to apply and reference concepts from the required readings in your answers to each of the scenarios.

Case Assignment Question

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:

What is the value of this bond?
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?
What would happen to the value of the bond if the inflation rate unexpectedly goes up? What the bond value increase or decrease?
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?

The XYZ Corporation pays a dividend of $1 for each share and its required rate of return is 8%. Answer the following questions:

Assuming zero growth in dividends, what is the value of each share?
Now assume a 4% annual growth rate in the dividend paid. What is the value of each share?
Assume the growth rate is still 4%, but the required rate of return drops to 6%. What is the new value of each share?

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:

What is the present value of Acme’s future cash flows using the discounted cash flow model?
If the firm has 200,000 common shares outstanding, zero preferred shares, and debt with a market value of $10,000,000 what would be the value of each share?
Now suppose the discount rate increases to 10%. How would your answers to a) and b) above change based on the new discount rate?

Year

Cash flow

2018

500,000

2019

550,000

2020

620,000

2021

700,000

2022

800,000

Suppose the Alpha Manufacturing Corporation is experiencing extreme financial difficulties and is considering bankruptcy. Its shareholders are currently almost equally divided about whether or not the company should go bankrupt, with one outspoken faction pushing for bankruptcy and the other strongly opposing it. They have $50 million in debt all in the form of bonds, and bondholders are pretty well united in that they want the firm to declare bankruptcy.

Assignment Expectations

Answer the assignment questions directly.
Stay focused on the precise assignment questions. Do not go off on tangents or devote a lot of space to summarizing general background materials.
For computational problems, make sure to show your work and explain your steps.
For short answer/short essay questions, make sure to reference your sources of information with both a bibliography and in-text citations. See attached the Student Guide to Writing a High-Quality Academic Paper, including pages 11-14 on in-text citations.

Top of Form

Rubric Name: MBA/MSHRM/MSL Case Grading Rubric for Quantitative Business Courses -Timeliness v1

Criteria

Level 4 – Excellent

Level 3 – Proficient

Level 2 – Developing

Level 1 – Emerging

Assignment-Driven Criteria

19 points
Demonstrates mastery covering all key elements of the assignment in a substantive way.

18 points
Demonstrates considerable proficiency covering all key elements of the assignment.

17 points
Demonstrates partial proficiency covering all key elements of the assignment.

16 points
Demonstrates limited or poor proficiency covering all key elements of the assignment.

Presentation, Computation, and Relevance of Quantitative Information

10 points
Demonstrates mastery in presenting quantitative information in a format appropriate for the discipline. Supporting computations are relevant and accurate.

9 points
Demonstrates considerable proficiency in presenting quantitative information in a format appropriate for the discipline. Supporting computations are mostly relevant and accurate.

8 points
Demonstrate partial proficiency in presenting quantitative information in a format appropriate for the discipline. Supporting computations are not necessarily relevant and somewhat misleading.

7 points
Demonstrates limited or poor proficiency in presenting quantitative information in a format appropriate for the discipline. Supporting computations are not relevant, misleading or absent.

Critical Thinking

10 points
Analyzes quantitative and qualitative information as the basis for deep and thoughtful discussion, drawing insightful, carefully qualified conclusions from this work.

9 points
Analyzes quantitative and qualitative information as the basis for competent and thoughtful discussion, drawing reasonable and appropriately qualified conclusions from this work.

8 points
Analyzes quantitative and qualitative information as the basis for workmanlike (without inspiration or nuance, ordinary) discussion, drawing plausible conclusions from this work.

7 points
Analyzes quantitative and qualitative information as the basis for tentative or limited discussion; and is hesitant or uncertain about drawing conclusions from this work.

Business Writing

6 points
Demonstrates mastery and proficiency in written communication to an appropriately specialized audience.

5 points
Demonstrates considerable proficiency in written communication to an appropriately specialized audience.

4 points
Demonstrate partial proficiency in written communication to an appropriately specialized audience.

3 points
Demonstrates limited or poor proficiency in written communication to an appropriately specialized audience.

Timeliness

5 points
Assignment submitted on time or collaborated with professor for an approved extension on due date.

3 points
Assignment submitted 1-2 days after module due date.

2 points
Assignment submitted 3-4 days after module due date.

0 points
Assignment submitted 5 or more days after module due date.

Overall Score

Level 4
45 or more

Level 3
40 or more

Level 2
35 or more

Level 1
0 or more

Bottom of Form

Module 2 – Home

STOCK AND BOND VALUATION

Modular Learning Outcomes

Upon successful completion of this module, the student will be able to satisfy the following outcomes:

· Case

· Identify and explain the distinction between stocks and bonds.

· Apply discounted cash flow models to value stocks.

· Apply discounted cash flow models to value bonds.

· SLP

· Apply P/E ratios to assess and value stock investments.

· Apply the concept of liquidation value for stock investments.

· Evaluate the investment potential of a given company.

· Discussion

· Evaluate the investment potential of a given company.

Module Overview

What exactly are you buying when you purchase stock in a company? There are really two main benefits of owning shares in a company.

The first is that when a company is profitable, it pays dividends to investors. A share in a company is a share in profits. The simplest way to estimate the value of a stock is by how much dividends it pays. We will be using the tools of present value that you learned in Module 1, and apply them to estimating the present value of future dividends to be paid by a company. Specific tools include the zero growth dividend valuation method and the dividend growth model.

The second benefit is that shares in a company typically come with voting rights and a say in how management runs the company. You have probably heard the term “hostile takeover.” This refers to investors purchasing shares of a company in order to gain control of the company and oust the existing management team. Purchase enough shares of a company and get some existing shareholders to take your side and you can gain 51% of the company and vote to oust management.

Another way corporations raise money is by selling bonds. Bonds are different from stocks in that they don’t come with voting rights. However, bonds pay a set amount every year and also come with the promise that your investment will eventually be returned in the future. While bonds don’t come with voting rights or any say in management, if the company is unable to make its payments on your bonds or pay you back, then bondholders can force the company into bankruptcy. In bankruptcy, the assets of the company are sold and given to bondholders. While stock shares give voting rights, bondholders get preference when a company goes into bankruptcy. Shareholders are paid only after bondholders are paid. If there is no money left to pay shareholders, then shareholders get nothing. Overall, stocks are riskier than bonds, but on average give a higher rate of return. As you have probably guessed, we will also be applying the concept of present value to value bonds in this module.

Module 2 – Background

STOCK AND BOND VALUATION

Required Reading

Start off with these two tutorials that will give you an overview of the basic methods of valuing stocks and bonds from Subjectmoney:

Subjectmoney. (2013, January 2).

How to price/value bonds – formula, annual, semi-annual, market value, accrued interest [Video file]. Retrieved from

Subjectmoney. (2013, January 3). Dividend discount model (DDM) – constant growth dividend discount model – how to value stocks [Video file]. Retrieved from

Now dig much deeper into bond and stock valuation with the following books chapters. They cover not only the computational methods but also provide a general overview of stock and bond markets:

Ross, S., Westerfield, R., & Jordan, B. (2007). Chapter 6: Interest rates and bond valuation. Essentials of Corporate Finance. McGraw Hill. Retrieved from

http://novellaqalive2.mhhe.com/sites/dl/free/007000000x/484691/Part4_Chap6

[If this link is down, click

Interest Rates and Bond Valuation

for an alternative link.]

Gitman, L. (2005). Chapter 7: Stock valuation. Principles of Managerial Finance. Pearson Education. Retrieved from

http://wps.aw.com/wps/media/objects/222/227412/ebook/ch07/chapter07

[If the link is down, click

Stock Valuation

Managerial Finance

for an alternative link.]

Finally, for some examples of valuation calculations in Excel see the following videos:

Moy, M. (2014). Bond valuation in Excel. Retrieved from

Girvin, M. (2010). Stock valuation with dividend growth model. ExcellsFun. Retrieved from

Girvin, M. (2010). Stock value based on present value of future dividend cash flows. ExcellsFun. Retrieved from

Optional Reading

Davis, A. (2016). Bond pricing. Retrieved from

https://www.youtube.com/watch?v=-DnARyndirI

Ahmad, A. (n.d.). Bonds part II: Pricing. Coursera. Retrieved from

https://www.coursera.org/learn/finance-markets/lecture/EpByC/bonds-part-ii-pricing

Ozoguz, A. (n.d.) Basics of equity valuation. Coursera. Retrieved from

https://www.coursera.org/learn/global-financial-markets-instruments/lecture/vHPRN/basics-of-equity-valuation

Gitman, L. (2005). Chapter 6: Interest rates and bond valuation. Principles of Managerial Finance. Pearson Education. Retrieved from

http://wps.aw.com/wps/media/objects/222/227412/ebook/ch06/chapter06

[If the link is down click
Interest Rates and Bond Valuation
or
Managerial Finance
for an alternative link. For a video PowerPoint version of this chapter, click
Interest Rates and Bond Valuation
]

Ross, S., Westerfield, R., & Jordan, B. (2007) Chapter 7: Equity markets and stock valuation. Essentials of Corporate Finance. McGraw Hill. Retrieved from

novellaqalive2.mhhe.com/sites/dl/free/007000000x/484691/Chap7_EquityMkts

Student Guide to Writing

a High-Quality Academic Paper

Follow these guidelines when writing academic papers,
including your Trident University Case and SLP assignments.

 An effective academic writing style is an essential part of a university
education.

 Poorly written papers detract from your ability to effectively share
your knowledge and ideas with others, including your professors.

 This guide will help you prepare high-quality papers that are:

 Logically argued

 Clearly structured and formatted

 Written in a professional, academic style

The basic structure of an academic paper includes:

1. Cover page

2. Introduction

3. Body of the paper (which may have
subsections)

4. Conclusion

5. Reference page

 The cover page of an academic paper should
include the:

▪ University name

▪ Student’s name

▪ Assignment title

▪ Course number and name

▪ Professor’s name

▪

Date

 Note: Some professors recommend adding the assignment instructions

(tasks and/or questions) to the bottom of the cover page to help
students make sure they have addressed each part of the assignment.

Trident University

Student’s Name

Module 1 Case Assignment

Course Number: Course Name

Professor’s Name

Date

In the introduction, provide a brief, clear overview of:

1. Each problem or issue that you will discuss

2. The solution to the problem(s) or your response to the
issue(s)

3. How you will prove or demonstrate that your solution or
response is correct

Tip: Try writing the body of your paper first. Then come back
and write the introduction once you know what your paper is
about.

 The body of the paper is where you discuss the solution to the problem(s) or
your response to the issue(s) raised in the assignment.

 After you have read the materials related to the assignment, begin by
creating a quick outline:

 What are the main points of your argument? Jot them down.

▪ Depending on the length of the paper, 3–6 main points should be
plenty.

▪ If a point is complex, it may have 2 or 3 sub-points. Jot those down as
well.

 Now arrange those points in a logical sequence.

▪ Which point needs to be made first because it provides a
basis for the points that follow?

▪ For example, “Point A leads to point B, which leads to point C,
and when A, B, and C are considered together they mean that
the solution is point D.”

Example of the structure of a Case Assignment that requires 4 pages of text
(not including the cover page, and not including a reference page for assignments that require one):

Main Sections Points Sub-points Page # # of Paragraphs

Cover Page

Introduction 1 1
Body of Paper Point A 1 1

” Point B 2 1
” Sub-point 1 2 1
” Sub-point 2 3 1
” Point C 3 1
” Point D 4 2

Conclusion 4 1
Reference Page

In the body of your paper:

 Use headings and subheadings to help your reader follow the points
and sub-points in your discussion and to better organize sections and
subsections.

 Give each point and sub-point a short name that tells your reader what
that section is about. Use those names for your headings.

 Here is a quick “how-to” guide to headings with links to examples and
instructions: http://blog.apastyle.org/apastyle/2011/04/how-to-use-five-
levels-of-heading-in-an-apa-style-paper.html

 Now you are ready to begin writing the body of your paper.

 Discuss one point at a time and explain each point clearly.

 Discuss one point or sub-point in each paragraph.

 As you advance to writing more complex papers (e.g., upper-division
undergraduate or master’s-level assignments), it may take 2 or 3
paragraphs to fully develop and support a point.

http://blog.apastyle.org/apastyle/2011/04/how-to-use-five-levels-of-heading-in-an-apa-style-paper.html

In the body of your paper:

 Each paragraph should be made up of approximately 3–5 sentences. (Note: A
single sentence is not a paragraph. Break long sentences into 2 or 3 shorter ones.)

 Each paragraph should include:

 The point or focus of that paragraph in the first sentence

 Additional sentences in which you explain, elaborate, and support your point
(see section on Supporting Your Points that begins on the next slide)

 A conclusion/transition to the next point and paragraph

 Each point should be supported by citing and referencing the sources that provide
the foundation for your solutions and/or responses. How to do this will be discussed
on the next slide.

Supporting Your Points

 What makes an academic paper “academic”? How does an academic
paper differ from other types of writing—for example, a short story, a blog,
a newspaper article, a business letter, or an e-mail message?

 In an academic paper:

 You must provide support for each idea, statement, or point that you make
that is based on someone else’s ideas.

 Support is provided through citations and references. (References are
discussed beginning on Slide 17.) Citations appear within the paper itself
wherever you draw upon another person’s ideas or another source of
information. References are listed on a separate page at the end of your
paper.

 Each citation refers to a specific reference so that your reader can look up
the sources of your support and read them for himself or herself.

 Citations are short and usually only include the author’s last name and the
date of publication of the author’s work, for example, “In a study of K–

education, Jones (2013) found that…”

Citation Examples

 You can cite at the beginning or ending of a sentence:

 According to Jones (2007), a reason for poor student performance is large

classroom size.

 Student performance decreases as classroom size increases (Jones, 2007).

 When multiple sources support your point, cite them together in alphabetical order
at the end of the sentence:

 Educators agree that large classroom size decreases student performance
(Adams, 2005; Jones, 2007; Smith, 2008).

 When a source is written by more than one person, give their last names in the

citation at the end of the sentence, like this: (Smith, Adams, & Jones, 2006).

 When there is no author and/or no date (e.g., a Web page), see this example:
http://www.apastyle.org/learn/faqs/web-page-no-author.aspx

http://www.apastyle.org/learn/faqs/web-page-no-author.aspx

Do not spell out the titles and publication details of your sources in the body of your
paper. Instead, provide a short citation, and add a full reference with the publication details
in your reference list. Interested readers can then find the details about the article in your
reference list at the end of your paper.

Wrong:
 The first article that will be discussed is called “The Very Separate Worlds of Academic and

Practitioner Periodicals in Human Resource Management” written by Sara Rynes, Tamara
Giluk, and Kenneth Brown, which was published in the Academy of Management Journal
(2007) Vol 50, No.5, 987-1008. They studied the gap between academic and practitioner
knowledge.
 Note: Do not spell out the title and publication details of your sources in the text.

Right (two different ways):
1. Rynes, Giluk, and Brown (2007) found a gap between academic and practitioner knowledge.

 Note: The authors are the subject of the sentence. This is referred to as an “in-text citation” and
includes just the authors’ last names and year of publication.

2. A gap was found between academic and practitioner knowledge (Rynes, Giluk, & Brown,
2007).
 Note: The citation is placed at the end of a sentence in parentheses. This is called a

“parenthetical citation.” In this type of citation, use an ampersand (&) instead of “and.”

When should you cite a source?
 When you use your own words in referring to the ideas or concepts of others

 When you use the exact words that are written in one of the sources that you read

 Using someone else’s exact words is called a “quotation.”

 For quotes of less than 40 words, use quotation marks and follow the quote with a
parenthetical citation that includes:

▪ The name(s) of the author(s)

▪ The year of publication

▪ The page number the quote was taken from in the original source—
for example:
“Academic and practitioner periodicals in human resource management are
worlds apart” (Rynes, Giluk, & Brown, 2010, p. 992).

 Any phrase or quote of 40 or more words should be separated from the text of
your report by single spacing and by indenting from the both right and left margin.
This is called an “offset quote.”

Provide Support for Each of Your Points

 Scholarly academic work builds on previous knowledge and recognizes the contributions that
others have made to knowledge.

 Providing a citation for each source of information that you use is necessary for at least four
reasons:

 To help your reader understand the foundational information that you used to support your
points.

 To give credit to sources of knowledge and the work of others.

 To protect the source. If you make a good point but don’t cite your sources or indicate
direct quotes with quotation marks, the reader will attribute it to you by default.

 To avoid plagiarism. Incorporating material from outside sources (whether direct quotes or
paraphrasing) without proper identification or citation is a form of plagiarism. Never
represent the work of another as your own.

 Here is an excellent guide to help you understand plagiarism and how to avoid it (students are
strongly encouraged to study it carefully):

University Libraries, University of Missouri (n.d.). Plagiarism Tutorial. Retrieved March 1,
2013, at http://lib.usm.edu/legacy/plag/plagiarismtutorial.php

http://lib.usm.edu/legacy/plag/plagiarismtutorial.php

 In your conclusion:

 Summarize your argument regarding the solutions/responses

that you discussed in the body of your paper, including the most
important points you made and how they relate to your overall
conclusion.

 Do not discuss or raise new issues in the conclusion.

 Limit the conclusion to 1 or 2 paragraphs.

 The reference section, found at the end of the paper, is an alphabetical list of the
sources that you used to write your paper.

 Center the word “References” at the top of a new page.

 Starting on the same page, enter a full reference for each citation in your paper.
Provide only one reference for each source no matter how many times you cite it in
your paper.

 Each reference should include the following information (so readers can find the
source):

▪ Author’s last name, first initial, middle initial

▪ Year of publication

▪ Title of the article, book, or Web page

▪ Title of the publication where the article was found (If the article is from a
journal or newspaper, include the volume and issue number, and the pages
where the article is located.)

Reference section formats for different types of sources:

 Article on a Web page with no date:
 Author last name, first initial, middle initial (publication date). Title of the article. Retrieved
X date from http://
 Example (note that the second line of the reference is indented five spaces):

Dvoretsky, D. P. (n.d.). History: Pavlov Institute of Physiology of the Russian Academy of
Sciences. Retrieved March 1, 2013, from http://www.infran.ru/history_eng.htm

 Online newspaper article:
 Author name (year, month, day of publication). Article title. Newspaper Title. Retrieved X

date from http://
 Example (note that the second line of the reference is indented five spaces):

Hilts, P. J. (1999, February 16). In forecasting their emotions, most people flunk out. The New
York Times. Retrieved March 1, 2013, from http://www.nytimes.com

 Academic Journal Article:
 Author name, first initial, middle initial (publication year). Article title. Journal Title, vol.

#(issue #), page numbers where the article was found.
 Example (note that the second and third lines of the reference are indented five spaces):

Shapiro, D., Kirkman, B., & Courtney, H. (2007). Perceived causes and solutions of the
translation problem in management research. Academy of Management Journal, 50(2),

249-266.

 Book: Author name (publication year). Book Title. Location: Publisher.
 Example: Fitzgerald, S. P. (2002). Decision Making. London: Capstone Publishing, Ltd.

http://www.infran.ru/history_eng.htm

http://www.nytimes.com/

Reference Page Example
References

Allen, G. (1998). Motivating Supervision. Retrieved March 1, 2013, from:
http://www.businessballs.com/mcgregoryxytheorydiagrm

Chapman, A. (n.d.). Adam’s Equity Theory. Retrieved March 1, 2013, from:
http://www.businessballs.com/adamsequitytheory.htm

Chapman, A. (n.d.). Herzberg’s Motivation Theory. Retrieved June 1, 2009, from:
http://www.businessballs.com/herzberg.htm

Dreyfack, R. (2004, May). Personalizing productivity. Supervision, 65(5), 20-22.

Shapiro, D., Kirkman, B., & Courtney, H. (2007). Perceived causes and solutions of the
translation problem in management research. Academy of Management
Journal, 50(2), 249-266.
Notes:

 “n.d.” = no date. Use this for the date when there is no publication date available.
 First line of each reference is at the left margin, and each subsequent line in that

same reference is indented 5 spaces (one tab stop).
 Arrange references alphabetically based on last name of the first author of each

work. 19

http://www.businessballs.com/mcgregoryxytheorydiagrm

http://www.businessballs.com/adamsequitytheory.htm

http://www.businessballs.com/herzberg.htm

 Add an appendix after the reference page when you have supplemental
material (e.g., a chart, table, diagram, or picture) that you refer to in your
paper.



Appendices

are optional and depend upon the nature of the assignment.

 Appendices (if any) should be placed at the end of the paper and identified
with capital letters (e.g., Appendix A).

 The title of the appendix should be placed immediately below the appendix
label.

 The appendix label and title should be centered at the top of the page, as in
the example below:

Appendix A

Workflow Diagram

 When professors ask you to “follow APA style” or “use APA format,” they are referring to
the Publication Manual of the American Psychological Association, Sixth Edition.

 APA is one of several styles that is used for writing academic papers (MLA is another)
and includes extensive details about how to format citations and references.

 APA format is required for TUI doctoral students and recommended for Trident University
master’s and undergraduate students.

 APA helps to provide a common, standard format for academic scholars to follow.

 For additional information and guidance on APA style, here are two excellent resources:

 The APA Style website at http://www.apastyle.org (see the links and tutorials at the
bottom of the Web page)

 The Purdue Online Writing Lab (http://owl.english.purdue.edu/owl/resource/560/01/)
contains extensive, detailed guidance not only on APA format, but also on general
writing, job search writing, and research writing (see the tabs at the top of the Web
page).

http://www.apastyle.org/

http://owl.english.purdue.edu/owl/resource/560/01/

Set up your paper as follows:

 Set 1-inch margins on all four sides.

 Use 12-point type throughout; don’t use different type sizes.

 Double-space the text throughout the paper, including the
reference page.

 Do not put extra spaces between paragraphs or between
headings and paragraphs.

 Use italics or bold for emphasis, but use them sparingly or it
becomes too distracting for your reader.

Before you submit your assignment:

 Re-read the assignment instructions and make sure you addressed
each one in your paper.

 Always run spelling and grammar check in MS Word before submitting
your assignment.

 If you struggle with grammar, or have trouble with sentence and paragraph
structure, invite a classmate or colleague with strong English writing skills
to proofread your work prior to submission. This process will improve your
writing skills.

 Also, consult the Purdue Online Writing Lab (OWL) for writing guidance
and examples.

 Don’t expect overnight miracles. Writing and editing are iterative processes
that take ongoing practice, feedback, refinement, and attention to detail—
even for the best writers. Your writing will improve as you advance through
the program!

Slide Number 1
Developing Your Academic Writing Style
Basic Structure of a Well-Written Paper
Basic Structure: 1. Cover Page
Basic Structure: 1. Cover Page Example
Basic Structure: 2. Introduction
Basic Structure: 3. Body of the Paper

Basic Structure: 3. Body of the Paper
Basic Structure: 3. Body of the Paper
Basic Structure: 3. Body of the Paper
Basic Structure: 3. Body of the Paper
Basic Structure: 3. Body of the Paper
Basic Structure: 3. Body of the Paper
Basic Structure: 3. Body of the Paper
Basic Structure: 3. Body of the Paper

Basic Structure: 4. Conclusion
Basic Structure: 5. References

Basic Structure: 5. References
Basic Structure: 5. References
Appendices

The Basics of “APA Style”

The Basics of “APA Style”

Finalizing Your Paper
Slide Number 24

Module 2 – Case

STOCK AND BOND VALUATION

Assignment Overview

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?

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?

C. What would happen to the value of the bond if the inflation rate unexpectedly goes up? What the bond value increase or decrease?

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?

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?

B. Now assume a 4% annual growth rate in the dividend paid. What is the value of each share?

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?

3. Acme Medical Corp. is expecting the cash flows from

2018

–

2022

A. What is the present value of Acme’s future cash flows using the discounted cash flow model?

B. If the firm has 200,000 common shares outstanding, zero preferred shares, and debt with a market value of $10,000,000 what would be the value of each share?

C. Now suppose the discount rate increases to 10%. How would your answers to a) and b) above change based on the new discount rate?

Year	Cash flow
2018	500,000
2019	550,000
2020	620,000
2021	700,000
2022	800,000

1. Suppose the Alpha Manufacturing Corporation is experiencing extreme financial difficulties and is considering bankruptcy. Its shareholders are currently almost equally divided about whether or not the company should go bankrupt, with one outspoken faction pushing for bankruptcy and the other strongly opposing it. They have $50 million in debt all in the form of bonds, and bondholders are pretty well united in that they want the firm to declare bankruptcy.

A. The CEO announces that he is leaning against bankruptcy. This means one faction of shareholders is happy, but another faction of shareholders is very upset and the bondholders are also unhappy. Can the unhappy faction of shareholders team up with the bondholders to vote out the CEO? Explain your reasoning using references from the background readings.

B. Suppose Alpha ends up declaring bankruptcy. They do not have any cash in the bank but they own $60 million worth of real estate. They only have one type of shareholder—common shareholders. If they sell the real estate, how much of this will bondholders get and how much with shareholders get? Explain your reasoning using references from the background readings.

C. Now suppose that Alpha has two classes of shareholders—common shareholders and preferred shareholders. Preferred shareholders are owed $20 million in dividends that have been unpaid in the last two years. If Alpha goes bankrupt and sells its $60 million worth of real estate, how much will bondholders get, how much will common shareholders get, and how much will preferred shareholders get? Explain your reasoning using references from the background readings.

Assignment Expectations

· Answer the assignment questions directly.

· Stay focused on the precise assignment questions. Do not go off on tangents or devote a lot of space to summarizing general background materials.

· For computational problems, make sure to show your work and explain your steps.

For short answer/short essay questions, make sure to reference your sources of information with both a bibliography and in-text citations. See attached the
Student Guide to Writing a High-Quality Academic Paper
, including pages 11-14 on in-text citations.

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“ STOCK AND BOND VALUATION Assignment Overview Before starting on this assignment, make sure to thoroughly review the required background materials. This assignment will require you to use the various discounted cash flow methods and dividend models to ma ”

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