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Bank Loan and Mortgage Bond

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Rondo Common Stock
Rondo Debt (Bank Loan and Mortgage Bond)

In my mind, this is the core topic in financial analysis / valuation. The value of an asset, any asset, is the present value of its projected (future) earnings. Simple enough, huh? The key word here is projected. That is the word that makes finance an art, not a science. All of the math is based on projections, which are based on subjective assumptions.

Let's begin with the time value of money. A dollar today is not the same as a dollar tomorrow. In finance, we think in present value dollars. We project future cash flows and discount them back to the present. We then compare the discounted dollars with the initial investment. Future cash flows are discounted at a specified interest rate. The greater the rate, the lower the present value. Time value is based on four basic algebraic expressions...

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Solution Summary

The solution explains how to calculate the value of common stock, bank loan and mortgage bond for Rondo Company

See Also This Related BrainMass Solution

Weight Average Cost - The Rondo Company

Requirement A and B
Capital Structure Value Weights Cost of Capital Income Tax After- tax Cost of Capital Weighted Average Cost of Capital
Bank loan 7,500,000 17.26% 6.00% 40% 3.60% 0.62%
Mortgage bond 5,000,000 11.50% 9.00% 40% 5.40% 0.62%
Common stock 30,960,000 71.24% 17.01% 17.01% 12.12%
Total 43,460,000 WACC 13.36%

Bank loan
Interest rate 6.00%
Cost of bank loan 6.00%

Mortgage bond
Interest rate 7.50%
Cost of mortgage bond 9.00%

Common stock
Beta 1.20
Market price 62
Underwriting cost 9

2005 2004 2003
Total dividends paid 1,927,500 1,813,500 1,512,000
Shares outstanding 1,000,000 1,000,000 1,000,000
Dividends per share 1.9275 1.8135 1.512
Annual dividend growth rate 6.29% 19.94%
Compounded annual growth rate 12.91%

Cost of common stock
NOTE: Computing for the cost of common stock using CAPM is NOT possible.
The following variables are not provided in the case:
1. Risk free rate
2. Market risk premium

Computation using the Gordon Growth Model
Cost of equity 17.01%

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