Finance is all about valuation-how to estimate asset values and what to do to increase them. We

Question:

Finance is all about valuation-how to estimate asset values and what to do to increase them. We develop and use Excel models throughout the book. We start that process in this chapter with simple models used to value bonds, stocks, and capital budgeting projects. Working through the model will give you a refresher in valuation plus a refresher on (or preview of) Excel. The model can be accessed on the textbook’s Web site under the “Chapter Models” section. If you have never used Excel at all, then you should not attempt to use it to help answer this question, or if you do, you should not get frustrated if you have trouble.

a. Explain how to find the value of a bond given the rate of interest it pays (its coupon rate), its par value (assume $1,000), and the going rate of interest on bonds with the same risk and maturity.

b. Explain how to find the value of a stock given its last dividend, its expected growth rate, and its required rate of return.

c. Explain how to find the value of a capital budgeting project given its cost, its expected annual net cash flows, its life, and its cost of capital.

d. In each of the above cases, discuss how changes in the inputs would affect the output. Would it matter if the outputs were highly sensitive to changes in the inputs?

Capital Budgeting
Capital budgeting is a practice or method of analyzing investment decisions in capital expenditure, which is incurred at a point of time but benefits are yielded in future usually after one year or more, and incurred to obtain or improve the... Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Par Value
Par value is the face value of a bond. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par,...