Understanding how to properly value a vanilla bond is essential for finance. Find a company with debt and that pays dividends. You can use the following stock screener to find a company: http://www.google.com/finance/stockscreener. Add the criteria of long-term debt to assets to ensure the company has debt. Add the criteria of dividend per share. Find the company’s financial pages at: http://www.sec.gov/edgar.shtml. Look at the long-term debt on the balance sheet. Determine the coupon price, the length until maturity and the yield to maturity. Calculate today’s price of the bond.
List the pertinent information on the bond you chose and then calculate the price of one bond from both companies.
Which bond is receiving the higher price? Explain your answer.
From a time value of money frame of mind, what does each rate say about the viewpoint on the time value of money?
Which company has a better credit rating? Explain your answer.
Based on the credit rating, which company do you believe the bank feels more secure will pay back the loan? Explain your answer.
Why does the bank charge more interest for one company than another?
What does the credit rating say to an investor?
Which bond looks is more financially attractive? Explain why you chose the answer you did.
Part II Deliverable Length: 700-1000 words
Understand how to properly find the value of a stock using the dividend growth rate is a fundamental building block in valuation. Find two companies and evaluate each stock using a constant dividend growth model. Please use a standard long-term economic growth rate of 3% in your calculations.
Calculate the future growth rate for both companies.
Which stock has the better growth rate? Do you agree with this assessment? Explain. Support your answer with either a description of a new product growth or from past growth performance.
Calculate the future stock price for both companies.
From a time value of money point of view stand point what does the calculated stock price say about the market’s view on the time value of money for each stock?
Compare the calculated stock price with the current stock price for both companies.
Is either stock underpriced or overpriced? Explain.
Should an investor purchase either of those stocks?
Should one stock outperform the other?
Based on the ratings found in Phase 4, does one stock seem more financially healthy? Explain.
Does this financial health make a stronger case to invest in the stock? Explain.
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