Floating Rate Loans At Bensington Glass Company

Floating Rate Loans The Bensington Glass Company Entered Into A Loa

(Floating-rate loans). The Bensington Glass Company entered into a loan agreement with the firm’s bank to finance the firm’s working capital. The loan called for a floating rate that was 27 basic points (0.27 percent) over an index based on LIBOR. In addition, the loan adjusted weekly based on the closing value of the index for the previous week and had a maximum annual rate of 2.24 percent and a minimum of 1.72 percent. Calculate the rate of interest for week 2 through 10.

Date LIBOR Week 1 1.94% Week 2 1.59% Week 3 1.55% Week 4 1.32% Week 5 1.59% Week 6 1.66% Week 7 1.69% Week 8 1.94% Week 9 1.88% The rate of interest for week 2 is ………%

Bond Valuation

Calculate the value of a bond that matures in 17 years and has a $1,000 par value. The annual coupon interest rate is 15% and the market’s required yield to maturity on a comparable risk bond is 14%. The value of the bond is ……..

Common Stock Valuation – Constant Growth Model

Header Motor, Inc., paid a $4.43 dividend last year. At a constant growth rate of 5 percent, what is the value of the common stock if the investors requested a 10 percent rate of return? The value of the common stock is $......

Stock Valuation with Growth

The common stock of NCP paid $1.41 in dividends last year. Dividends are expected to grow at an annual rate of 6.60 percent for an indefinite number of years. If your required rate of return is 8.70 percent, what is the value of the stock for you? Should you make the investment? If your required rate of return is 8.70 percent, the value of the stock for you is $.....

Relative Valuation Using P/E Ratio

Using the P/E ratio approach to valuation, calculate the value of a share of stock under the following conditions: The investor’s required rate of return is 13%. The expected earnings at the end of this year (E1) are $7. The firm retains 60% of its earnings. The return on equity (ROE) is 13%. Similar shares sell at multiples of 7.693 times earnings per share. Show that you get the same answer using the dividend discount model. The stock price using the P/E ratio valuation method is $.....

Paper For Above instruction

The following analysis encompasses various aspects of financial valuation including floating-rate loans, bond valuation, stock valuation (both the dividend discount model and the P/E ratio approach), and the impact of market variables on these financial instruments. Each section provides detailed calculations and conceptual understanding to assist in grasping fundamental financial principles and their application in real-world scenarios.

Floating Rate Loan Interest Calculation

The Bensington Glass Company's floating rate loan is tied to LIBOR with a spread of 27 basis points, and it is subject to weekly adjustments based on the previous week's LIBOR. The key is to determine the weekly interest rate, constrained within the minimum of 1.72% and the maximum of 2.24%. For Part 1, Week 2's LIBOR was 1.59%. Adding 0.27% results in 1.86%, but since this exceeds the minimum and maximum thresholds, the interest rate for Week 2 becomes 1.86%, consistent with the maximum or minimum constraints if applicable. Repeating this process for weeks 3 to 10 involves adding 0.27% to each week's LIBOR, then applying the constraints as necessary.

Calculations are as follows:

  • Week 2 LIBOR: 1.59% + 0.27% = 1.86% (within range) -> Interest rate = 1.86%
  • Week 3 LIBOR: 1.55% + 0.27% = 1.82% -> Interest rate = 1.82%
  • Week 4 LIBOR: 1.32% + 0.27% = 1.59% -> Interest rate = 1.59%
  • Week 5 LIBOR: 1.59% + 0.27% = 1.86% -> Interest rate = 1.86%
  • Week 6 LIBOR: 1.66% + 0.27% = 1.93% -> Interest rate = 1.93%
  • Week 7 LIBOR: 1.69% + 0.27% = 1.96% -> Since 2.24% is maximum, interest rate = 1.96%
  • Week 8 LIBOR: 1.94% + 0.27% = 2.21% -> within max limit, interest rate = 2.21%
  • Week 9 LIBOR: 1.88% + 0.27% = 2.15% -> within max limit, interest rate = 2.15%

All interest rates are bounded below 1.72% and above 2.24%. For each week, the interest rate is the LIBOR plus spread, constrained by the bounds. Week 2's interest rate is 1.86%, based on the calculation.

Bond Valuation

The bond's present value is calculated using the present value of its coupon payments and face value, discounted at the market yield to maturity (YTM) of 14%. With a $1,000 par value, annual coupon rate of 15%, and 17 years to maturity, the coupon payments are $150 annually. The present value of the coupons is calculated using the formula:

PV of coupons = C × [1 - (1 + Y)^-N] / Y where C = 150, Y = 0.14, N = 17.

PV of face value = FV / (1 + Y)^N.

Applying these formulas yields a bond value approximating $1,262, implying that the bond is slightly undervalued or overvalued depending on current market conditions.

Stock Valuation - Constant Growth Model

The value of Drug Motor Inc.'s stock is calculated using the Gordon Growth Model, which states:

P = D / (r - g)

where D = $4.43 × (1 + 0.05) = $4.66, r = 10% or 0.10, g = 5% or 0.05.

Thus, P = 4.66 / (0.10 - 0.05) = $93.20.

This indicates investors' valuation based on the future dividends growing at a constant rate, considering their required return.

Stock Valuation with Growth Rate and Dividend Discount Model

NCP's stock valuation involves the Gordon Growth Model as well. Dividends last year were $1.41, with a growth rate of 6.60%. With a required rate of return of 8.70%, the stock's intrinsic value is:

P = D1 / (r - g) where D1 = D0 × (1 + g) = 1.41 × 1.066 = $1.50366.

Therefore, P = 1.50366 / (0.087 - 0.066) ≈ $123.78.

This suggests a potentially attractive investment if the current market price is below this valuation.

P/E Ratio Valuation

The stock's value using the P/E ratio is determined by multiplying expected earnings per share (EPS) by the P/E multiple:

EPS = $7; P/E = 7.693; thus, Price = 7 × 7.693 = $53.85.

Alternatively, using the dividend discount approach—assuming retained earnings contribute to growth and dividends are paid out accordingly—the valuation converges to the same estimate, confirming the consistency of the models.

Both methods reflect the investor's required return, growth expectations, and market pricing multiples, all critical in investment decision-making.

Conclusion

This comprehensive analysis demonstrates the interconnectedness of different valuation techniques and the importance of understanding market variables, discount rates, and growth assumptions. By applying these principles accurately, investors and financial managers can make informed decisions to optimize returns and manage risks effectively.

References

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  • Bethke, R. (2019). Understanding Financial Statements. Harvard Business Review.
  • Investopedia. (2023). Discounted Cash Flow (DCF). https://www.investopedia.com/terms/d/dcf.asp
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