Vanilla Stock Evaluation

Vanilla Stock Evaluation

Key Assignment Final Draft 

Part I  Deliverable Length: 700-1000 words

Understanding how to properly value a vanilla bond is essential for finance. Find a company with debt and that pays dividends. You can use the following stock screener to find a company:

http://www.google.com/finance/stockscreener

. Add the criteria of long-term debt to assets to ensure the company has debt. Add the criteria of dividend per share. Find the company’s financial pages at:

http://www.sec.gov/edgar.shtml

. Look at the long-term debt on the balance sheet. Determine the coupon price, the length until maturity and the yield to maturity. Calculate today’s price of the bond. 

• List the pertinent information on the bond you chose and then calculate the price of one bond from both companies.
• Which bond is receiving the higher price? Explain your answer.
• From a time value of money frame of mind, what does each rate say about the viewpoint on the time value of money?
• Which company has a better credit rating? Explain your answer.
• Based on the credit rating, which company do you believe the bank feels more secure will pay back the loan? Explain your answer.
• Why does the bank charge more interest for one company than another?
• What does the credit rating say to an investor?
• Which bond looks is more financially attractive? Explain why you chose the answer you did. 

Part II  Deliverable Length: 700-1000 words

Understand how to properly find the value of a stock using the dividend growth rate is a fundamental building block in valuation. Find two companies and evaluate each stock using a constant dividend growth model. Please use a standard long-term economic growth rate of 3% in your calculations.

• Calculate the future growth rate for both companies.
• Which stock has the better growth rate? Do you agree with this assessment? Explain. Support your answer with either a description of a new product growth or from past growth performance.
• Calculate the future stock price for both companies.
• From a time value of money point of view stand point what does the calculated stock price say about the market’s view on the time value of money for each stock?
• Compare the calculated stock price with the current stock price for both companies.
• Is either stock underpriced or overpriced? Explain.
• Should an investor purchase either of those stocks?
• Should one stock outperform the other?
• Based on the ratings found in Phase 4, does one stock seem more financially healthy? Explain.
• Does this financial health make a stronger case to invest in the stock? Explain.