Verify the price (ignore accrued interest) and current yield of Bond "A", given information provided in Exhibit 3 based on the date of the quote.

Verify the yield to maturity and current yield of Bond "B", based on the date of the quote.

Jason, the client, wondered how each bond would perform if interest rates increased. His fear was that general interest rates could rise by as much as 1% in the near future. Calculate the total return percent of both bonds if sold in one year and interest rates have gone up 1%.

(Hint: change the settlement date to a year later on the pricing spreadsheet and increase the yield to maturity by 1%.

Note: Total Return % = ($ coupon payments received + price gain or loss) / purchase price)

Compare and explain the total returns of the two bonds.

	Bond A	Bond B
Current price (at time of quote)
Price in one year (from time of quote) if interest rates up 1%
Coupon $ paid during year
Current yield % (coupon $ / original price)
Capital appreciation % (price sold - price paid) / price paid
Total return % (current yield % + appreciation %)

Compare and explain the total returns of the two bonds.

Jason was immediately drawn to Bond "A" because it had so much more current yield than Bond "B". Currently, the cash to buy the bonds was sitting in a money market account, drawing less than 20 basis points of interest per year. Jason wanted to increase the income on his investments. What comments do you have for Jason regarding his preference?

Jason wanted Jennifer to value the company using 4 different methods and compare results with the current share price.Constant growth: Medtronic's current dividend amount is $1.72 per share. Analysts' consensus called for growth of 6.0%, and the required return for the company was 8.5%. What is the implied value of the company stock? Non-constant growth: Jason believed that the constant growth value was understating the true value of Medtronic and that its growth rate was too low. He believed that the near term growth in dividends of Medtronic was going to be 12% for the next 3 years, followed by 6.5% constant growth thereafter. Calculate the implied value of the company stock if the required return is 8.5%. Note current dividend is $1.72.PE multiple: An analyst friend of Jennifer specialized in health product companies similar to Medtronic and asserted that the company should trade at 28 times expected EPS. Jason felt the company's net income would be $4.8 billion next year (note: 1.38 billion shares outstanding). Calculate the implied value of the company stock.

Discounted free cash flow model: The analyst also did a more detailed analysis of Medtronic's free cash flows. A projection of FCFs is contained in the excel file: "Medtronic bond and stock spreadsheets.xls". Complete the spreadsheet modeling and derive the implied share price using this approach. Paste the model with results below (paste of "picture").

Given the valuation results obtained above, how would you respond to Jason? Should he buy the shares or not? Consider issues of market efficiency and diversification in your response.

Exhibit 3Medtronic Bonds

Bond "B"

MEDTRONIC INC

Coupon Rate

1.375 %

Maturity Date

04/01/2018 Symbol MDT3983792	CUSIP 585055BA3	Next Call Date	Callable Yes
Last Trade Price $100.42	Last Trade Yield	Last Trade Date 09/09/2016	US Treasury Yield

Bond "A"

MEDTRONIC INC

Coupon Rate

6.500 %

Maturity Date

03/15/2039 Symbol

MDT.GM

CUSIP

585055AQ9

Next Call Date

Callable

Yes

Last Trade Price

Last Trade Yield

3.705%

Last Trade Date

09/09/2016

US Treasury Yield

Medtronic Free Cash Flow Valuation
	user inputs in RED
	Discount rate/required return/cost of capital			8.40%
	Horizon Growth (constant growth)			3.50%
	Shares outstanding (millions)			1,380
	Long term debt ($ millions)			30,247
	Growth Rate %			12.0%	10.0%	8.0%	7.0%	6.0%
	Year	2016		2017 proj	2018 proj	2019 proj	2020 proj	2021 proj
	Revenue ($millions)	28,833		32,293	35,522	38,364	41,050	43,512
	Costs	20,722	72%	23,209	25,530	27,572	29,502	31,272
	Depreciation	2,820		650	675	700	725	750
	EBIT	5,291		8,434	9,318	10,092	10,823	11,490
	Tax (% of EBIT))	798	15%	1,272	1,405	1,522	1,632	1,733
	Change in net capital spending (use of cash)			825	850	875	900	925
	Change in net working capital (use of cash)			100	105	110	115	120
	FCF			6,887	7,632	8,285	8,900	9,462
	Terminal Value							199,870
	Total CFs			6,887	7,632	8,285	8,900	209,333
	NPV			$165,658	----> "Enterprise Value" = market value of assets
	less debt			30,247
	Equity value			$135,411
	Share value			$ 98.12