Bronco Asset Management

You have finally landed your dream job as a financial analyst at Bronco Asset Management $($BAM$).$ Sam Brown and Shawn Ted are senior Bronco Asset Management $($BAM$)$ vice presidents and co$-$directors of the company's pension fund management division. Brown is responsible for fixed$-$income securities $($primarily bonds$),$ and Ted is responsible for equity investments. A major new client, the California Faculty Association $($CFA$),$ has requested that BAM present an investment seminar to the faculty of the universities. Brown and Ted will make the presentation and ask you to help them with their topics.

Part I

Sam Brown remembered reading a Bloomberg News report on AT&T$\text{'}$s largest $$22\mathrm{.}5$ billion bond offering in July $2017.$ AT&T used the money to finance an $$85\mathrm{.}4$ billion takeover of Time Warner Inc. Bonds, a form of long$-$term debt issued by companies needing financing for various reasons. Sam Brown was interested in understanding the process of bond issues and all the attributes included in the bond indenture.

A$.$ Discuss the type of bonds companies could issue.

B$.$ Discuss indenture and its covenants.

C$.$ Discuss the relationship between bond prices and interest rates.

D$.$ What is the difference between callable bonds and non$-$callable?

E$.$ What is the value of a bond with an $8\%$ coupon rate, ten years maturity, and market interest rates of $6\%,8\%,$ and $10\%?$

F$.$ Which bonds appreciate or depreciate if the coupon rate changes to $6\%$ or $10\%?$

G$.$ Explain the implications of your answers in parts $($E$)$ and $($F$).$

Part II

To present the concept and valuation of the common stock, Ted has asked you to analyze Apple Company $($APPL$)$ Inc., which designs, manufactures, and markets smartphones, personal computers, tablets, wearables, and accessories worldwide. Specifically, Ted asked you to go over the following issues for him:

H$.$ Describe the legal rights and privileges of common stockholders.

I. Explain the valuation process for stocks.

J$.$ Using Apple$$s dividend payment, beta, MRP of $6\%,$ and risk$-$free rate of $4\%,$ estimate the stock price based on the constant dividend growth model.

K$.$ Using the multiperiod dividends model, estimate Apple$$s stock price.

L$.$ Using a multiperiod free cash flow model, estimate the enterprise value and stock price. Compare the estimated stock price to the market price and explain the price difference.

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Growth Estimates Apple Year $2023$

Current Qtr$.11\mathrm{.}20\%$ Current Estimate EPS $$6\mathrm{.}59$

Next Qtr$.3\mathrm{.}90\%$ Payout Ratio $415\mathrm{.}33\%$

Current Year $19\mathrm{.}00\%$ Diluted Average Shares $15,924,064$

Next Year $8\mathrm{.}50\%$ Dividend per share $($DPS$)$ $$1\mathrm{.}01$

Next $5$ Years $($per annum$)6\mathrm{.}14\%$ Free Cash Flow $$100,987,000$

Past $5$ Years $($per annum$)20\mathrm{.}88\%$ Long Term Debt $$95,281$

Forward Dividend & Yield $$0\mathrm{.}96(0\mathrm{.}53\%)$ Current Debt $$15,807$

Source: Yahoo. Finance Market Cap $$286800$

Growth Estimates AAPL

Current Qtr$.11\mathrm{.}20\%$

Next Qtr$.3\mathrm{.}90\%$

Current Year $19\mathrm{.}00\%$

Next Year $8\mathrm{.}50\%$

Next $5$ Years $($per annum$)6\mathrm{.}14\%$

Past $5$ Years $($per annum$)20\mathrm{.}88\%$

Source: Yahoo. Finance$-$ Analysis