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    Valuation of Rondo's securities

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    Prepare a valuation of Rondo's securities using the methods demonstrated. You should value the existing mortgage bond, the required rate of return on equity securities using the CAPM model and the theoretical common stock price using the Gordon Dividend Constant Growth Stock Model. Please prepare a one-page executive summary analyzing your findings

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    1. Existing Mortgage Bond - The existing mortgage bond would be valued using the current rate of interest and the value would be the present value of cash flows discounted at the current rate of interest. The mortgage bond is for $5,000,000 and has a interest rate of 7.5%. The new mortgage bond would have an interest rate of 9%. The repayment for mortgage bonds begins in 2010 with $500,000 being repaid each year. The calculate the cash flows for the bond which is the interest and principal repayment and discount these are 9% to get the value of the mortgage bond. This is in the table below:

    Year Opening Balance Interest (7.5% of opening principal) Repayment Total Payment Discounting Factor (9%) Discounted Value
    2006 5,000,000 375,000 - 375,000 0.917 343,875
    2007 5,000,000 375,000 - 375,000 0.842 315,750
    2008 5,000,000 375,000 - 375,000 0.772 289,500
    2009 5,000,000 375,000 - 375,000 0.708 265,500
    2010 5,000,000 375,000 500,000 ...

    Solution Summary

    The solution explains the valuation of Rondo's securities in order to eventually calculate the estimated stock price. It is a total of about 1,035 words.