Bond Valuation Essay
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 …show more content…
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