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Stock and Bond Valuation, Time Value of Money, WACC

1. Valuing a bond and valuing a stock:
a. Bond valuation-what is the PV or the appropriate selling price of a 30 year bond which has a 10% coupon, paid annually, and has a 10 years till maturity, during a time when market interest rates are 5%
b. Using the dividend discount model determine the appropriate market price for a share of the XYZ company when:
i. Its expected next dividend is $1.00
ii. Its recent dividend growth rate is 5%
iii. The prevailing discount rate is 7%

2. Determining present and future values:
c. What is the PV of $1000 received 10 years from now if your personal investment track record reaps a 10% return
d. What is the future value, 5 years from now, of $100 invested at 3% today

3. Capital project analysis:
Project A costs $10,000 and saves $2000 in each of 6 years. What is the NPV of investing in this project if the discount rate of your company is
e. 2%....if its
f. 10%
g. for the very same information, what's the simple payback for project A

4. WACC:
h. in laymans terms what is WACC; why is it important to a company
i. calculate this firms WACC, when common stockholders expect a 10% return, and they represent 33% ownership in the company, preferred stock was issued at 6%, and this represents 33% of the firms value, and bonds outstanding, issued at 8% represent 33% of the firms value; their tax rate is 40%

Solution Preview

Note: The abbreviations have the following meanings

PVIF= Present Value Interest Factor
PVIFA= Present Value Interest Factor for an Annuity
FVIF= Future Value Interest Factor
FVIFA= Future Value Interest Factor for an Annuity

They can be read from tables or calculated using the following equations
PVIFA( n, r%)= =[1-1/(1+r%)^n]/r%
PVIF( n, r%)= =1/(1+r%)^n
FVIF( n, r%)= =(1+r%)^n
FVIFA( n, r%)= =[(1+r%)^n -1]/r%

1. Valuing a bond and valuing a stock

a. Bond valuation-what is the PV or the appropriate selling price of a 30 year bond which has a 10% coupon, paid annually, and has a 10 years till  maturity, during a time when market interest rates are 5%

To calculate the price of the bond we need to calculate / read from tables the values of
PVIF= Present Value Interest Factor
PVIFA= Present Value Interest Factor for an Annuity
Price of bond= PVIF * Redemption value + PVIFA * interest payment per period

PVIFA( n, r%)= =[1-1/(1+r%)^n]/r%
PVIF( n, r%)= =1/(1+r%)^n

Price of bond
Coupon rate= 10.000%
Face value= $1,000
Interest payment per year= $100.00 =10.% x 1000

Frequency= A Annual

No of years to maturity= 10
No of Periods=n= 10 =1 x 10

Discount rate annually= 5.00% Annual
Discount rate per period=r= 5.00% =5.%/1

Price of bond=PVIFA X Interest Payment per period +PVIF X Redemption value

Interest payment per period= $100.00 =100/1
Redemption value= $1,000 =Face Value

PVIF (10 periods, 5.% ...

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Answers questions on Stock and Bond Valuation, Time Value of Money, WACC

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