Financial Policy and Strategy FIN4443G1-105092022

WEEK 1 ESSAY

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Week 1 Essay (Bond and 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.

In your discussion, provide descriptive answers and examples for the following questions, along with a list of reputable sources used to support the contents of your post. 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!

  1. Explain the difference between common stock and preferred stock. What are some of the characteristics of each type of stock?
  2. (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?

  3. 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%, explain how to calculate the market value for this stock.
  4. 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%

    (1) Compute the company’s economic value added (EVA)
    (2) Interpret the value you computed in part (1).

  5. 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.
  6. What are the key features of a bond?
  7. How do you determine the value of a bond?
  8. 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%? How does this compare with the value of a similar 10-year bond

As you develop your essay, be sure you fully address all of the questions and concerns posed by the case study. Go well beyond simply stating your opinion — back up and support your position by referencing documented racts and examples from related news articles, trade journal or business publications, academic studies, etc. Use Keiser’s online library to help you locate suitable articles from legitimate news sources, periodicals, trade journals, academic studies, etc.

Assignment Grading Criteria:

Thoroughly answered all of the questions: 60 points possible

Spelling/Grammar at the college level: 20 points possible

References to course material: 20 points possible

Total: 100 points

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