Module 4 Instructor Model 9/28/96

Beatrice Peabody
Bond and Stock Valuation

The case is a straight-forward and reviews the principles of bond

and stock valuation. It requires pulling information from standard
sources. The model is not complicated, but it is long because it has
components which value bonds, preferred stock, and common stock.

If you are using the student version of the model, the cells containing
formulas have been blanked out. Before using the model, it is necessary
to fill in the empty cells with the appropriate formulas. Once this is
done, the model is ready for use.

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INPUT DATA: KEY OUTPUT:

Bond and Note Analysis: Bond and Note Analysis:

8-Year Note 2003): 8-Year Note:

Annual coupon rate 6.75% Semiannual coupons:
Par value $1,000 Value $1,024.96
Required return 8.50% YTM 8.31%
Price $910.20 EAR 8.48%

26-Year Bond (2021): 26-Year Bond:

Coupon rate 9.25% Semiannual coupons:
Par value $1,000 Value $1,024.96
Required return 9.00% YTM 8.39%
Price $1,090.50 EAR 8.57%

28-Year Bond (2023): 28-Year Bond:

Coupon rate 7.75% Semiannual coupons:
Par value $1,000 Value $872.92
Required return 9.00% YTM 8.50%
Price $920.34 EAR 8.68%

Preferred Stock Analysis: Preferred Stock Analysis:

(Series K) (Series A)
Dividend yield 3.380% $ Div. $3.38
Par value $100.00 Nom return 7.77%
Price $43.50 EAR return 8.00%

Common Stock Analysis: Common Stock Analysis:

Constant growth model: Price $20.98

Next dividend (D1) $0.60 Return 7.72%
Normal growth rate 5.50%
Required rate 8.36%
Price $27.00

Nonconstant growth model:

Nonconstant growth rates:
1996 4.00% Value $34.58
1997 4.00% Yield :
1998 4.00% Yr. Div. Yld CG Yld Tot Yld
1999 4.00% 1995 1.67% 7.83% 9.50%
1996 1.62% 7.88% 9.50%
Normal growth rate 8.00% 1997 1.56% 7.94% 9.50%
Required rate 9.50% 1998 1.50% 8.00% 9.50%
Next dividend (D1) $0.60 1999 1.50% 8.00% 9.50%
2000 1.50% 8.00% 9.50%

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MODEL-GENERATED DATA:

Bond Analysis:

Bond Cash Flows: Semiannual Coupon

---------------------- ---------------------- ----------------------
Period 8-Year 26-Year 28-Year
------ ------ ------- -------
0 ($910.20) ($1,090.50) ($920.34)
1 33.75 46.25 38.75
2 33.75 46.25 38.75
3 33.75 46.25 38.75
4 33.75 46.25 38.75
5 33.75 46.25 38.75
6 33.75 46.25 38.75
7 33.75 46.25 38.75
8 33.75 46.25 38.75
9 33.75 46.25 38.75
10 33.75 46.25 38.75
11 33.75 46.25 38.75
12 33.75 46.25 38.75
13 33.75 46.25 38.75
14 33.75 46.25 38.75
15 33.75 46.25 38.75
16 1,033.75 46.25 38.75
17 46.25 38.75
18 46.25 38.75
19 46.25 38.75
20 46.25 38.75
21 46.25 38.75
22 46.25 38.75
23 46.25 38.75
24 46.25 38.75
 25 46.25 38.75
26 46.25 38.75
27 46.25 38.75
28 46.25 38.75
29 46.25 38.75
30 46.25 38.75
31 46.25 38.75
32 46.25 38.75
33 46.25 38.75
34 46.25 38.75
35 46.25 38.75
36 46.25 38.75
37 46.25 38.75
38 46.25 38.75
39 46.25 38.75
40 46.25 38.75
41 46.25 38.75
42 46.25 38.75
43 46.25 38.75
44 46.25 38.75
45 46.25 38.75
46 46.25 38.75
47 46.25 38.75
48 46.25 38.75
49 46.25 38.75
50 46.25 38.75
51 46.25 38.75
52 1,046.25 38.75
53 38.75
54 38.75
55 38.75
56 1,038.75

Bond Values:

8-year bond $899.90

26-year bond $1,024.96
28-year bond $872.92

Bond YTMs:

8-year bond 8.31%

26-year bond 8.39%
28-year bond 8.50%

Bond EARs:

8-year bond 8.48%

26-year bond 8.57%
28-year bond 8.68%

Preferred Stock Analysis:

Annual Quarterly
----------- ---------
Dollar dividend $3.38 $0.85
Nominal return 7.77% 7.77%
Effective return 7.77% 8.00%

Common Stock Analysis:

Constant growth model:

Expected return given price 7.72%

Expected price given return $20.98

Nonconstant growth model:

End of Stock Div. CG Total

Year t Div. Value Yield Yield Yield
---- ---- ------ ------ ------ ------ ------
1995 0 34.58 1.74% 7.76% 9.50%
1996 1 0.60 37.27 1.67% 7.83% 9.50%
1997 2 0.62 40.18 1.62% 7.88% 9.50%
1998 3 0.65 43.35 1.56% 7.94% 9.50%
1999 4 0.67 46.79 1.50% 8.00% 9.50%
2000 5 0.70 50.54 1.50% 8.00% 9.50%
2001 6 0.76 54.58 1.50% 8.00% 9.50%
2002 7 0.82 58.95 1.50% 8.00% 9.50%
2003 8 0.88 63.66 1.50% 8.00% 9.50%
2004 9 0.95 68.76 1.50% 8.00% 9.50%
2005 10 1.03

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