__Valuation of Financial Instruments__

Deliverable Length: Word

document of 700–1,000 words with attached Excel Spreadsheet showing

calculations

Apply the time value of money in making

financial decisions.

Determine the relationship between risk

and return by calculating stock and portfolio variance.

Apply valuation formulas to assess the

value of stocks and bonds.

Use effective communication, team and

problem-solving skills to collaborate on a project.

Weekly tasks or assignments (Individual or Group Projects) will

be due by Monday, and late submissions will be assigned a late penalty in

accordance with the late penalty policy found in the syllabus. NOTE: All

submission posting times are based on midnight Central Time.

After engaging in a dialogue with your colleagues on valuation, you

will now be given an opportunity to apply principles that were presented in

this phase. Using a Web site that provides current stock and bond pricing and

yield information, complete and analyze the tables illustrated below. Your

mentor suggests using a Web site similar to this one.

To fill out the first table, you will need to select 3 bonds

with maturities between 10 and 20 years with bond ratings of “A to

AAA,” “B to BBB” and “C to CC” (you may want to use

bond screener at the Web site linked above). All of these bonds will have

these values (future values) of $1,000. You will need to use a coupon rate of

the bond times the face value to calculate the annual coupon payment. You

should subtract the maturity date from the current year to determine the time

to maturity. The Web site should provide you with the yield to maturity and the

current quote for the bond. (Be sure to multiply the bond quote by 10 to get

the current market value.) You will then need to indicate whether the bond is

currently trading at a discount, premium, or par.

Bond |
Company/ |
Face Value (FV) |
Coupon Rate |
Annual Payment (PMT) |
Time-to Maturity (NPER) |
Yield-to-Maturity |
Market Value (Quote) |
Discount, Premium, Par |

A-Rated |
$1,000 |
|||||||

B-Rated |
$1,000 |
|||||||

C-Rated |
$1,000 |

- Explain the relationship

observed between ratings and yield to maturity. - Explain why the coupon

rate and the yield to maturity determine why the bonds would trade at a

discount, premium, or par. - Based on the material you

learn in this Phase, what would you expect to happen to the yield to

maturity and market value of the bonds if the time to maturity was

increased or decreased by 5 years?

In this step, you have been asked to visit a credible Web site

that provides detailed information on publicly traded stocks and select 1 that

has at least a 5-year history of paying dividends and 2 of its closest

competitors.

To fill up the first table, you will need to gather information

needed to calculate the required rate of return for each of the 3 stocks. You

will need to calculate the risk-free rate for this assignment. You will need

the market return that was calculated in Phase 2, and the beta that you should

be able to find on the Web site.

Company |
5-year Risk-Free Rate |
Beta (β) |
5-Year Return on Top |
Required Rate of Return |

To complete the next table, you will need the most recent

dividends paid over the past year for each stock, expected growth rate for the

stocks, and the required rate of return you calculated in the previous table.

You will also need to compare your results with the current value of each stock

and determine whether the model suggests that they are over- or underpriced.

Company |
Current Dividend |
Projected Growth Rate |
Required Rate of Return |
Estimated Stock Price |
Current Stock Price |
Over/Under Priced |

In the third table, you will be using the price to earnings

ratio (P/E) along with the average expected earnings per share provided by the

Web site. You will also need to compare your results with the current value of

each stock to determine whether or not the model suggests that the stocks are

over- or underpriced.

Company |
Estimated Earning |
P/E Ratio |
Estimated Stock Price |
Current Stock Price |
Over/Under Priced |

After completing the 3 tables, explain your findings and why your

calculations coincide with the principles related to bonds that were presented

in the Phase. Be sure to address the following:

- Explain the relationship

observed between the required rate of return, growth rate and the dividend

paid, and the estimated value of the stock using the Gordon Model. - Explain the value and

weaknesses of the Gordon model. - Explain the how the

price-to-earnings model is used to estimate the value of the stocks. - Explain which of the 2

models seemed to be the most accurate in estimating the value of the

stocks. - Based on the material that

you learn in this Phase, what would you expect to happen to the value of

the stock if the growth rate, dividends, required rate of return, or the

estimated earnings per share were to increase or decrease? Be sure to

explain each case separately.

**Note:** You can find information about the top 500 stocks at this Web site.

**References**

*S&P 500 index chart*. (2014). Retrieved from the Yahoo! Finance Web site:

http://finance.yahoo.com/echarts?s=%5egspc+interactive#symbol=^gspc;range=1y;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=;

*Yahoo! Finance*. (n.d.). Retrieved from http://finance.yahoo.com/

Be sure to document your paper with in-text citations, credible

sources, and a list of references used in proper APA format.

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