Valuation
Not what you're looking for?
Turn your focus to valuing the firm's stock and bonds. The CFO likes to use the dividend discount model to value the firm's stock and the present value formula to value bonds.
With that in mind, you decide to put an Excel spreadsheet together to value the firm's stock and bonds. The company's stock trades for US$30 per share, with an annual dividend payment of US$1.67, which is expected to grow to US$1.75 next year. The required return on stocks is 12%, and the dividend is expected to increase by 5% for the foreseeable future. The bonds you are valuing have 3 years to maturity, a 6% annual coupon, and a face value of US$1,000. The market interest rates are 5%.
Use Microsoft Excel to calculate the value of the stocks and the bonds. In addition, answer these questions:
At the current trading price of US$30 per share, is the dividend discount model value of the stock equal to the market value? If they are different, explain why.
At the face value of US$1,000, is the bond trading price greater than, equal to, or less than its face value? Explain your answer.
Purchase this Solution
Solution Summary
The solution explains how calculate the price of a stock and a bond.
Solution Preview
The dividend discount formula for calculating the stock price is
Price = D1/(ke g)
where D1 is the expected dividend = 1.75
Ke is the required return = 12%
g is the growth rate = 5%
Price comes to $25
The price of the bond is the present value of interest and principal disocunted at the market rate. The price comes to ...
Purchase this Solution
Free BrainMass Quizzes
Transformational Leadership
This quiz covers the topic of transformational leadership. Specifically, this quiz covers the theories proposed by James MacGregor Burns and Bernard Bass. Students familiar with transformational leadership should easily be able to answer the questions detailed below.
MS Word 2010-Tricky Features
These questions are based on features of the previous word versions that were easy to figure out, but now seem more hidden to me.
Six Sigma for Process Improvement
A high level understanding of Six Sigma and what it is all about. This just gives you a glimpse of Six Sigma which entails more in-depth knowledge of processes and techniques.
Change and Resistance within Organizations
This quiz intended to help students understand change and resistance in organizations
Paradigms and Frameworks of Management Research
This quiz evaluates your understanding of the paradigm-based and epistimological frameworks of research. It is intended for advanced students.