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# managerial finance 4-1

Part 1: Time Value of Money

Time value analysis has many applications. For example, you use time value of money concepts in valuing stocks and bonds, establishing loan payment schedules, financing different types of projects, deciding whether or not to invest in a new plant and/or equipment, etc. All business and personal investment decisions involving money revolve around time value of money concepts. It is very important to not only understand the concept, but also to be able to compute time value of money problems that involve compounding, discounting skills and using the skills in financial decisions. To be able to use these concepts, it is important you review all related materials for these concepts. Learning tends to be richer and long lasting when you can define your own problems and background contexts.

For Part 1 of this assignment, think of four examples in your organization or from your personal life, or a combination of both, that demonstrate the following:

A. Present Value (PV) of a lump sum B. Future Value (FV) of a lump sum C. Present Value (PV) of an annuity D. Future Value (FV) of an annuity

Your demonstration must include numerical calculations that apply all the concepts listed above. You may use Excel or formula for your calculations. If you use Excel, please attach your Excel output as a separate file. If you use formula, provide step-bystep calculations. Explain your examples, including why they are relevant to your organization and/or personal life. Provide a rationale for interest or discount rates used in your examples. Be sure to have a conclusions section that documents what you learned from this exercise. Finally, be sure to use citations and related reference materials as appropriate.

Part 2: Common Stock Valuation :

Part 2 of this assignment is to help you understand and demonstrate how to value common stocks. From a managerial point of view, it is important to understand how decisions can be analyzed in terms of alternative courses of action and their likely
impact on a firm’s value. Thus, it is necessary to know how common stock prices can be estimated before attempting to measure how a particular decision might affect a firm’s market value.

Use the company your group picked for your Group Company Project. Estimate your company’s common stock price, using one of the valuation models presented in the assigned readings or outside readings. Please note that you cannot use “zero growth model” for this assignment. If the company you picked for your Group Company Project does not pay dividend, you need to find another publicly traded company that pays dividend.

Provide explanation of the model you used and explain why it is appropriate to use for your company’s stock. Be sure to explain how you arrived at any assumptions regarding values used in the model. Determine whether your company appears to be correctly valued, overvalued, or undervalued based on your company’s stock current price and model (calculation) result. Finally, explain why your company’s stock appears to be over-, under-, or correctly valued.

Part 3: Bond Valuation

Mr. James Johnson is the vice-president City Investment Services. As an MBA degree holder, Mr. Johnson has requested you to help them prepare for a seminar that will be presented to potential investors. Their presentation will focus on corporate bonds. Mr. Johnson have asked you to help them by answering the following questions relating to corporate bonds.

A.  What are the key features of a bond?           B.  What are call provisions and sinking fund provisions?  Do these provisions make bonds more or less risky?

C.  How is the value of any asset whose value is based on expected future cash flows determined?

D.  How is the value of a bond determined?  What is the value of a 10-year, \$1,000 par value bond with a 10 percent annual coupon if its required rate of return is 10 percent?

E. What would be the value of the bond described in Part D if, just after it had been issued, the expected inflation rate rose by 3 percentage points, causing investors to require a 13 percent return?  Would we now have a discount or a premium bond?
F. What is the yield to maturity on a 10-year, 9 percent annual coupon, \$1,000 par value bond that sells for \$887.00? That sells for \$1,134.20?  What does the fact that a bond sells at a discount or at a premium tell you about the relationship between required rate of return and the bond’s coupon rate? What is the yield-to-maturity of the bond?

G. If a firm were to default on the bonds, would the company be immediately liquidated? Would the bondholders be assured of receiving all of their promised payments?  Discuss the advantages and disadvantages of using a long-term loan instead of a bond.

Specific Instructions:

If you use Excel for any of your calculations, please submit the Excel worksheet. Be sure the label your Excel worksheet appropriately. Use Word for your discussions. Please DO NOT use any other format such PDF, etc. Use APA throughout including in-text citations and references.