Bond Valuation Essay

1311 Words 6 Pages
Register to read the introduction… This portion of the project will evaluate the stock of the same two companies from Part One by using a constant growth rate model.

In order to figure the growth rate, you must find the historical data of the stock chosen. The average rate from the four quarters of the year 2006 for Safeway, Inc (SWY) produces the present value. The average rate for the year 2011 produces the future value. When you subtract the present value year (2006) from the future value year (2011) you get the number of years that is inserted into the formula. To get an accurate measurement of the growth, a period of four-to-five years will suffice. The following information is the result of these values inserted into the Excel program rate function.
-0.056 Present value
0.14 Future value
5 Number of periods
20% Growth rate
The same formula was used to produce the following results for the Intel (INTC) stock.
-0.10 Present value
0.20 Future value
5 Number of periods
15% Growth
Fifteen percent of .20 is more than twenty percent of .14.
The future prices of the two stocks can be found by dividing the future price of the dividend by the required rate of return minus the growth rate. I understand the formula, yet I come up with some strange numbers when I do the calculations. Here is what I come up with
The future dividend of SWY is .14 X (1+.20) =.168. This number is then divided by the required rate of return (.0925) minus the growth rate (0.2). This results in the integer - 0.1075. When .168 is divided by -0.1075 the calculator proclaims the common stock value to be \$1.56. The same formula for Intel produces a value of the common stock at \$3.18. (Note: The required rate of return is determined by adding 2% to the current coupon rate).
To figure the future prices of a stock examine a five-year history of the stock in question. Subtract the year-end price per share from the year-starting price per share for each of the years. Average these values by adding them together and dividing by five. This will result in the average capital gain for SWY at \$2.16 per share and INTC losing an average of

Related Documents

• Bond Concepts: Bond Pricing

Bond Concepts: Bond Pricing It is important for prospective bond buyers to know how to determine the price of a bond because it will indicate the yield received should the bond be purchased. In this section, we will run through some bond price calculations for various types of bond instruments. Bonds can be priced at a premium, discount, or at par. If the bond's price is higher than its par value, it will sell at a premium because its interest rate is higher than current prevailing rates. If the…

Words: 2607 - Pages: 11
• Importance Of Derivatives

derivative is an agreement between two parties that is contingent on a future outcome of the underlying. Some of the widely known underlying assets are: * Indexes (consumer price index (CPI), stock market index, weather conditions or inflation) * Bonds * Currencies * Interest rates * Exchange rates * Commodities * Stocks (equities) Categorization Derivatives are usually broadly categorized by the: * relationship between the underlying and the derivative (e.g., forward…

Words: 1901 - Pages: 8
• Summary Of Annie Russell Theatre's Foreigner

to be the foreigner. Charlie didnâ€™t want to pretend to be a foreigner, but got caught in the trap, and in order to prevent conflict, he decides to carry on with his deception. Finally, the theme of growth occurs as Charlie transforms from a boring vanilla guy into a provocative hero. Charlie saves the house from being overtaken by the townsfolk, and reveals David as a deceitful scoundrel, which allows the story to end on peaceful and jubilant accords. The play concentrates heavily on the topic of…

Words: 783 - Pages: 4