Stock valuation questions and answers

Before starting on this assignment, make sure to thoroughly review the required background materials. This assignment will require you to use the various discounted cash flow methods and dividend models to make computations. In addition to knowing the computational steps involved in stock and bond valuation, make sure you also understand the basic concepts.

Submit your answers in a Word document. Make sure to show your work for all quantitative questions, and make sure to fully explain your answers using references to the background readings for any conceptual questions. Questions 1 and 3 will require Excel, so submit an Excel file that shows your computational steps as a separate file in addition to your Word file. Question 4 is purely conceptual; no computations are necessary, but make sure to apply and reference concepts from the required readings in your answers to each of the scenarios.

Case Assignment
Suppose you buy a bond that will pay $1000 in 10 years along with an annual coupon payment of $50. The interest rate is 4%. Answer the following questions:
What is the value of this bond?
Now suppose the bond has no coupon payments (it is a “zero coupon” bond) but still pays $1000 in 10 years. What is the value of this bond?
What would happen to the value of the bond if the inflation rate unexpectedly goes up? What if the bond value increases or decreases?
Now suppose the bond still pays an annual coupon of $50 but the interest rate drops to 2%. What is the new value of this bond?
The XYZ Corporation pays a dividend of $1 for each share, and its required rate of return is 8%. Answer the following questions:
Assuming zero growth in dividends, what is the value of each share?
Now assume a 4% annual growth rate in the dividend paid. What is the value of each share?
Assume the growth rate is still 4%, but the required rate of return drops to 6%. What is the new value of each share?
Acme Medical Corp. is expecting the cash flows from 2018-2022 shown in the table below. After 2022, it is expecting growth in cash flow at an annual rate of 3%. The firm has determined that its weighted average cost of capital (discount rate) is 7%. Using the table below, calculate the following:
What is the present value of Acme’s future cash flows using the discounted cash flow model?
If the firm has 200,000 common shares outstanding, zero preferred shares, and debt with a market value of $10,000,000, what would be the value of each share?
Now suppose the discount rate increases to 10%. How would your answers to a) and b) above change based on the new discount rate?