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 one company.
- Choose another company, find a bond, list all pertinent information and calculate today’s price.
- Which bond is receiving the better 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?
- What does that tell you about the credit rating of each company?
- Which company has a better credit rating? Explain your answer.
- Based on the credit rating, which company do you think 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 more attractive from the company’s view point? Explain why you chose the answer you did.
Understand how to properly find the value of a stock using the dividend growth rate is a fundamental building block in valuation. Using the same two companies, evaluate each stock using a constant dividend growth model.
- 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 under or over priced? 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.