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 stock and bond valuation process. As a result, Bell and Norris have asked you to analyze Tech Temps Company, an employment agency that supplies IT workers to companies with temporarily heavy information technology workloads.
Your detailed report should provide descriptive answers and examples to the following questions, along with a list of trusted sources used to support the content of your report. Use appropriate headings and subheadings to organize your writing; don’t just repeat the questions followed by short answers for each one. Your customer expects much more than that!
Questions
1. What is the difference between common shares and preferred shares?
2. What are some of the characteristics of each type of action?
3. What is a classified stock? When “made public, why might a small company designate some currently outstanding shares as” Founder’s Shares “?
4. What formula can be used to value any stock, regardless of its dividend pattern?
5. What is a constantly growing stock? How do you value a constantly growing stock?
6. What happens if the growth is constant and g> rs?
Tech Temps has an outstanding preferred stock issue that pays shareholders a dividend equal to $ 10 each year. If the appropriate required rate of return for this stock is 8%, what is its market value?
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
Exceptional shares 150,000
Marginal tax rate 30.0%
1. Calculate the added economic value of the company (EVA
2. Interpret the value you calculated in part (1).
7. Suppose normally the P / E ratio of Tech Temps is 20x. Using the information previously given, calculate the market price per share for Tech Temps common stock.
8. What are the main characteristics of a bond?
9. How is the value of a bond determined?
10. What is the value of a 1-year bond with a face value of $ 1,000 with an annual coupon of 10% if its required rate of return is 10%? What is the value of a 10-year bond?
11. What is the price risk of the interest rate? Which bond has more interest rate price risk, a one-year bond or a 10-year bond? Why is this?
12. What is the interest rate reinvestment risk? Which bond has more interest rate reinvestment rate risk (assuming a 10-year investment horizon)?
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