# 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%.

https://brainmass.com/business/bond-valuation/stock-bond-valuation-time-value-money-wacc-104671

#### Solution Preview

See the attached file.

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 ...

#### Solution Summary

The solution answers questions on stock and bond valuation, time value of money, and WACC.