Expert answer:Valuation of Financial Instruments

Expert answer:Word document of 700–1,000 words with attached Excel Spreadsheet showing calculationsAfter engaging in a dialogue with your colleagues on valuation, you
will now be given an opportunity to apply principles that were presented
in this phase. Using a Web site that provides current stock and bond
pricing and yield information, complete and analyze the tables
illustrated below. Your mentor suggests using a Web site similar to this one.To fill out the first table, you will need to select 3 bonds with
maturities between 10 and 20 years with bond ratings of “A to AAA,” “B
to BBB” and “C to CC” (you may want to use bond screener at the Web site
linked above). All of these bonds will have these values (future
values) of $1,000. You will need to use a coupon rate of the bond times
the face value to calculate the annual coupon payment. You should
subtract the maturity date from the current year to determine the time
to maturity. The Web site should provide you with the yield to maturity
and the current quote for the bond. (Be sure to multiply the bond quote
by 10 to get the current market value.) You will then need to indicate
whether the bond is currently trading at a discount, premium, or par.

Bond

Company/Rating

Face Value (FV)

Coupon Rate

Annual Payment (PMT)

Time-to Maturity (NPER)

Yield-to-Maturity (RATE)

Market Value (Quote)

Discount, Premium, Par

A-Rated

$1,000

B-Rated

$1,000

C-Rated

$1,000

Explain the relationship observed between ratings and yield to maturity.
Explain why the coupon rate and the yield to maturity determine why the bonds would trade at a discount, premium, or par. In this step, you have been asked to visit a credible Web site that
provides detailed information on publicly traded stocks and select 1
that has at least a 5-year history of paying dividends and 2 of its
closest competitors. “To fill up the first table, you will need to gather information
needed to calculate the required rate of return for each of the 3 stocks
(use the Capital Asset Pricing model). You will need to find the
risk-free rate online. It is the 5-year Treasury rate. You will need
the market return which is just the return on the S&P 500 Index, and
it is available online. You should use an average over 5 years (find
the historical yearly returns for the S&P 500 Index and average
them). You must research your stocks to find the betas. You should be
able to find them at finance.yahoo.com.”

Company

5-year Risk-Free Rate of Return

Beta (ß)

5-Year Return of S&P 500 Index

Required Rate of Return (CAPM)

“To complete the next table, you will need the most recent dividends
paid over the past year for each stock, next year’s expected dividends,
the expected growth rate of the dividends (which you can calculate by
taking next year’s dividend subtracting off this year’s dividend and
dividing the result by this year’s dividend), and the required rate of
return you calculated in the previous table. You will also need to
compare your results with the current value of each stock and determine
whether the model suggests that they are over- or underpriced.

Company
Current Dividend
Projected Growth Rate of Dividends
Next year’s Dividend
Required Rate of Return (CAPM)
Estimated Stock Price (Gordon Model) = Next year’s dividend / (required rate of return – projected growth rate of dividends)
Current Stock Price
Over/under Priced

In the third table, you will be using the price to earnings ratio
(P/E) along with the average expected earnings per share provided by the
Web site. You will also need to compare your results with the current
value of each stock to determine whether or not the model suggests that
the stocks are over- or underpriced.CompanyEstimated Earning (next year)P/E RatioEstimated Stock Price (P/E)Current Stock PriceOver/Under PricedAfter completing the 3 tables, explain your findings and why your
calculations coincide with the principles related to bonds that were
presented in the Phase. Be sure to address the following:Explain the relationship observed between the required rate of
return, growth rate and the dividend paid, and the estimated value of
the stock using the Gordon Model.
Explain the value and weaknesses of the Gordon model.
Explain the how the price-to-earnings model is used to estimate the value of the stocks. Note: You can find information about the top 500 stocks at this Web site.ReferencesS&P 500 index chart.
(2014). Retrieved from the Yahoo! Finance Web site:
http://finance.yahoo.com/echarts?s=%5egspc+interactive#symbol=^gspc;range=1y;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=;Be sure to document your paper with in-text citations, credible sources, and a list of references used in proper APA format.

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