# The financial leverage ratios

Using the information from the websites the student will develop evaluation of bond and stock performance for THE COMPANY (SELECTED BY INSTRUCTOR). (The evaluation portion will total 85% of the assignment grade)

-1—Background and Industry (one short paragraph).

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-2- The financial leverage ratios (10% of the project grade)

a) Find the financial leverage ratios for THE COMPANY assigned for you of the project for the last 3-5 years in the Internet. Present these ratios as the table(s) in your project.

·      Debt-to-assets ratio (Debt ratio)

·      Debt-to Equity ratio

·      Interest Coverage ratio (the Times Interest Earned)

b) Write (about) 1 page of the analysis of the ratio results. In your analysis you should answer the following questions. Please explain your answer to each question.

How is THE COMPANY financing its assets? Discuss how much risk is associated with the bonds issued by the company? How can this risk be measured? Please explain.

-3- Collect and evaluate the data about bond performance of the assigned company. (15% of the project grade).

Copy the quotations of two bonds issued by THE COMPANY (SELECTED BY INSTRUCTOR) that contain the Price. Present these quotations in your project.

1. Assume that par value of the bond is \$1,000. What were the last prices of the bonds in \$\$\$ (listed in the Price column)? Show your work in your project.
2. Assume that par value of the bond is \$1,000. Calculate the annual coupon interest payments. Show your work in your project.
3. Assume that par value of the bond is \$1,000. Calculate the current yield of the bonds. Show your work in your project.

4.     Write a 1-2 page of the analysis of the bonds. In your analysis you should answer the following questions. Please explain your answer to each question.

a)     How much is the YTM listed in quotations is for the bonds? Explain the meaning of YTM?

b)    If you are going to buy a bond issued by THE COMPANY, which bond would you choose? Why?

c)     Are these bonds callable? If the bonds that you chose are callable (non-callable), will it change your decision to buy them?

d)    If you are an investor who is looking for a bond to invest in, are you going to buy a bond that you chose? Take a look at the balance sheet and income statement of the company. What data or ratios support your decision to buy this bond or not? You may want to incorporate the results of the Research Project Part 1, as well as the results of the financial leverage ratios to answer this question. You should develop a specific recommendation, with supporting rationale to explain your answer.

-4- Collect and evaluate the data about stock performance of the assigned company for the last one year. (totally 35% of the project grade).

1) Find the market ratios for the company for the last 1-3 years and its major competitor for the last year in the Internet. (10% of the project grade)

1. Present the market ratios as the table(s) in your project.
2. Write about 1 page of analysis of the market ratio results that you found. Compare the market ratio results against the industry or main competitor. In your report please answer the question: Are the common stockholders receiving an adequate return on their investment?

c.     Compare the P/E ratio of your company with the industry average or 5-year average. Is the stock overvalued, undervalued, or properly valued? Why?  In accordance with your findings, is it reasonable to buy the stock? Please explain your answers.

-2) Analysis of the historical stock prices trend for the last year. (10% of the project grade)

1. Collect and evaluate the data about stock prices of the assigned company for the last one year for the company and its major competitor.
2. Create the chart(s) using the stock price chart tools on the websites or Excel. Present the chart(s) in your project.
3. Write about 0.5 page of analysis the historic stock prices trend for the last year.

3) Apply the Capital Asset Pricing Model (CAPM) Security Market Line to estimate the required return on THE COMPANY stock. Note that you will need the risk-free rate and the market return. Show this information in your project. (15% of the project grade)

1. Apply the Capital Asset Pricing Model (CAPM) Security Market Line to estimate the required return on stock. Note that you will need the risk-free rate, beta, and the market return.

a) To get the current yield on 10-year Treasury securities go to www.finance.yahoo.com -click on Markets – U.S. Treasury Bonds Rates.  You will use the current yield on 10-year Treasury securities as the risk-free rate to estimate the required rate of return on stocks. Discuss how appropriate this rate is as a measure of risk.

b) Between 1926 and 2017, the compound annual rate of return of S&P 500 is estimated a 10%. We will use this number as the market return. Discuss how appropriate this rate is as a measure of return.

c) Beta is listed in www.finance.yahoo.com under Trading Information – Stock Price History, as well as on the company’s front page. What is the beta listed for the company? What does it mean?

d)  Calculate the required return on the stockusingthe Capital Asset Pricing Model (CAPM) Security Market Line. Please show your work.

2. There are several methods how to calculate the growth rate. One of the possible ways is to calculate the sustainable growth rate as g = ROE *(1- Dividend payout ratio). You can find ROE and the dividend Payout Ratio on www.finance.yahoo.com under Statistics.

Calculate the company’s sustainable growth rate. Please show your work.

3. Apply the Gordon model (constant growth rate model) to calculate the intrinsic (economic) value of the stock. Please show your work.

Please note that for some companies it is not possible to use the Gordon model. If that is the case, please explain why it is not possible to use this model for your company. What other models is it possible to use?

4. Compare the result of your calculations with the current stock price. Is the stock overvalued, undervalued, or properly valued? Why?  In accordance with your findings, is it reasonable to buy the stock? Why? Please explain your answer.

-5- Develop a specific recommendation, with supporting rationale for your client, as to whether the assigned company’s recent trend in financial and stock performance is of sufficient financial strength to warrant entering in a long-term investment in bonds and/or stocks of the company. Explain your answer (about 1 page) (10% of the project grade).

-6- Develop a specific recommendation, with supporting rationale for the COMPANY’S management – Think about the financial strategy of the company, how to best balance THE COMPANY’S financial leverage to optimize shareholder wealth going forward taking into consideration the company’s current market position, credit rating, dividend policy, etc.  (10% of the project grade).

-7- Reflection – the students should write a paragraph in their own words reflecting on what they learned from the assignment and how they think they could apply what they learned in the workplace. (5% of the project grade).

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