Bond and Stock Valuation

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Part A

These resources will help you to complete this discussion:

  • Ross, S. A., Westerfield, R. W., Jaffe, J. F., & Jordan, B. D. (2018). Corporate finance: Core principles and applications (5th ed.). New York, NY: McGraw-Hill.
    • Chapter 5, “Interest Rates and Bond Valuation,” pages 130–164. This chapter illustrates the employment of time value of money concepts to determine the value of corporate debt/bonds and common/preferred stock.
  • McCracken, M. (n.d.). Bond valuation [Video] | Transcript. Retrieved from http://www.teachmefinance.com/bondvaluation.html

The time value of money concepts are used to compute financial instruments like corporate debt and bonds. All investments are ultimately tied to cash, how much is received, and how quickly it is received. The concepts employed here are the same valuation concepts that you will use to complete the Unit 6 assignment, Evaluation of Capital Projects.

In this discussion, examine the way cash flows are analyzed to determine prices for financial securities and how these securities relate to enterprise value. Imagine you have graduated with your MBA, and your grandmother has asked your advice on a bond that her broker has recommended. She sent you the following e-mail:

Hi there! I just met with Amanda Ritter—you know, that broker I was telling you about at dinner the other night. Anyway, Amanda says I should consider buying some bonds, but I have no idea what to do. I have some questions for you.

  • What information do I need to determine the suitability of a bond?
  • What type of information do I need to determine the price of the bond?
  • What factors could impact the bond price, going forward?
  • What else should I think about so I can make an informed choice on whether to buy the bond or not?
  • Are there good resources that you can send to me? (I’d love to read them and start educating myself on bonds.)

Thanks for your help. It would be great if you could e-mail your answers and send me a list of resources by the end of the week. I’d like to prepare before meeting with Amanda again. Thanks!

Prepare a post that addresses your grandmother’s questions, and include a list of resources that will help her to understand bonds and bond valuation.

Response Guidelines

Read the responses that were sent to the hypothetical grandmother. Put yourself in the role of the grandmother, and respond to two of the responses you want to seek clarification about.

Whether in academia or in a professional setting, you should strive to support your thoughts and ideas with current research and cite your sources using APA style.

Learning Components

This activity will help you achieve the following learning components:

  • Compare the indicated projects with correct computations of capital budgeting tools.
  • Make rational decisions based on correct computations.
  • Analyze capital budgeting metric and indicate decisions in a concise manner.
  • Make correct decisions as to which projects will add the most value to the firm.
  • Use capital budgeting tools and then use the data to evaluate capital projects that will add the most value to the firm.

 

Part B

Impacts to Common Stock Prices

These resources will help you to complete this discussion:

  • Ross, S. A., Westerfield, R. W., Jaffe, J. F., & Jordan, B. D. (2018). Corporate finance: Core principles and applications (5th ed.). New York, NY: McGraw-Hill.

The primary way a stock price is valued is the employment of the time value of expected cash flows that the company will generate. Most of the time, a metric to monitor future cash is earnings. This is why earnings per share (EPS) is probably the most watched financial ratio on the market. It is anticipated that earnings will turn into cash, which would enrich shareholders through the issuance of cash dividends and the repurchases of shares so that current shareholders will own a bigger share of the company earnings and resulting value.

Knowing how stock prices are impacted is key knowledge for financial management, since its primary goal is to increase the firm’s stock price. Knowledge of how increased earnings and cash flows can be generated by a firm’s investments can greatly influence the attractiveness of said investments to the firm.

As a business professional, you should realize how stock prices fluctuate and how a company can influence directly and indirectly its own stock price. However, the prices calculated in academic formulas typically vary significantly from the actual market price traded on the stock exchanges. This shows how there are so many factors that impact stock price beyond the time value of money and growth formulas.

For this discussion, you are the CFO who accompanied the CEO to the annual shareholders’ meeting. The CEO gave an excellent speech that outlined the company’s strategic plan, for which he received thunderous applause and praise. Later that week, the CEO calls you, angrily demanding that you, as the CFO, explain to him why the price of the stock was unmoved by his performance and, in fact, dropped.

In your post, provide an explanation to the CEO about what impacts the stock price and what factors cause stock prices to rise and fall. Plus, you will need to indicate why actual market stock prices sometimes vary greatly from academic stock valuations via formulas.

Response Guidelines

Read the posts from your fellow learners. As the CEO, select two posts to respond to. You may want to ask additional clarifying questions or just add additional insights to the posts.

Whether in academia or in a professional setting, you should strive to support your thoughts and ideas with current research and cite your sources using APA style.

Learning Components

This activity will help you achieve the following learning components:

  • Compare the indicated projects with correct computations of capital budgeting tools.
  • Make rational decisions based on correct computations.
  • Analyze capital budgeting metric and indicate decisions in a concise manner.
  • Make correct decisions as to which projects will add the most value to the firm.
  • Use capital budgeting tools and then use the data to evaluate capital projects that will add the most value to the firm.

 

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