Stock Valuation

BOND & STOCK VALUATION Bob Bell and Carrie Norris are senior vice-presidents of the Mutual Money Investment Bank of New York. They are co-directors of the company’s investment securities underwriting division. A major new client has requested that Mutual Money of New York produce an investment report to describe the valuation process for stocks and bonds. As a result, Bell and Norris have asked you to analyze the Tech Temps Company, an employment agency that supplies IT workers to businesses with temporarily heavy information technology workloads. Your detailed report must provide descriptive answers and examples for the following questions, along with a list of reputable sources used to support the contents of your report. Use appropriate headings and subheadings to organize your writing; do not simply restate the questions followed by short answers for each. Your client is expecting much more than that! a. What is the difference between common stock and preferred stock? What are some of the characteristics of each type of stock? b. What is classified stock? When “going public, why might a small company designate some stock currently outstanding as “founders’ shares”? c. (1) What formula that can be used to value any stock, regardless of its dividend pattern? (2) What is a constant growth stock? How do you value a constant growth stock? (3) What happens if the growth is constant, and g > rs? d. Tech Temps has an issue of preferred stock outstanding that pays stockholders a dividend equal to $10 each year. If the appropriate required rate of return for this stock is 8%, what is its market value? e. Tech Temps’ financial statements show the following information: Average cost of funds 10.0 % EBIT $ 500,000 Total capital $1,250,000 EPS $2.00 Shares outstanding 150,000 Marginal tax rate 30.0% © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. (1) Compute the company’s economic value added (EVA) (2) Interpret the value you computed in part l(1). f. Suppose that normally Tech Temps’ P/E ratio is 20x. Using the information given previously, estimate the market price per share for Tech Temps’ common stock. g. What are the key features of a bond? h. How do you determine the value of a bond? i. What is the value of a 1-year, $1,000 par value bond with a 10% annual coupon if its required rate of return is 10%? What is the value of a similar 10-year bond? j. What is interest rate price risk? Which bond has more interest rate price risk, a one-year bond or a 10- year bond? Why is this? k. What is interest reinvestment rate risk? Which bond has more interest rate reinvestment rate risk, assuming a 10-year investment horizon?

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