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Time Value of Money in bond market value; zero growth

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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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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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Financial Management Problems

26. You need to accumulate $10,000. To do so, you plan to make a deposit of $1,250 per year - with the first payment being made a year from today - into a bank account that pays 12% annual interest. Your last deposit will be less than $1,250 if less is needed to round out to $10,000. How many years will t take you to reach your $10,000 goal, and how large will the last deposit be?

1. Define each of the following terms:

a) Proxy; proxy fight; pre-emptive right; classified stock; founder's shares
b) Estimated value (Po); market price (Po)
c) Required rate of return, rs; expected rate of return, rs; actual, or realized, rate of return, rs
d) Capital gains yield; dividend yield; expected total return
e) Constant growth; no constant growth; zero growth stock
f) Preferred stock
g) Nonoperation assets
h) Value of operations; horizon value; free cash flow valuation model

2. Constant Growth Valuation:

Boehm Incorporated is expected to pay a $1.50 per share dividend at the end of this year. The dividend is expected to grow at a constant rate of 6% a year. The required rate of return on the stock is 13%. What is the estimated value per share of Boehm's stock?

5. No constant Growth Valuation

A company currently pays a dividend of $2 per share. It is estimated that the
company's dividend will grow at a rate of 20% per year for the next 2 years, and then
at a constant rate of 7% thereafter. The company's stock has a beta of 1.2, the risk-free
rate is 7.5%, and the market risk premium is 4%. What is your estimate of the stocks?
Current price?

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