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Time Value of Money in bond market value; zero growth

Valuation of common stock and bonds is an important financial task for investors. In the process of valuing bonds describe the relationship of time to maturity and market value (for premium, par-value, and discount bonds) and the relationship of required return to market value.

For common stock define the zero growth (dividend) model, the variable growth (dividend) model and the free cash flow valuation model. In addition to defining these models discuss at least 2 weaknesses of these models.

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Please see attached file for graphic illustration.

Valuation of common stock and bonds is an important financial task for investors. In the process of valuing bonds describe the relationship of time to maturity and market value (for premium, par-value, and discount bonds) and the relationship of required return to market value. For common stock define the zero growth (dividend) model, the variable growth (dividend) model and the free cash flow valuation model. In addition to defining these models discuss at least 2 weaknesses of these models.

For the relationship of time to maturity and market value, we can see from the figure below that the bond's market value will approach par value as it approaches the maturity date, regardless of the required return and regardless of the coupon rate.

The interest rates will determine the bond prices ...

Solution Summary

This solution is comprised of a detailed explanation to define the zero growth (dividend) model, the variable growth (dividend) model and the free cash flow valuation model.

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