Floating Rate Loans At The Bensington Glass Company

Floating Rate Loans The Bensington Glass Company Entered Into A

Calculate the interest rates for weeks 2 through 10 for a floating rate loan that is 27 basis points over LIBOR, with weekly adjustments based on the previous week's LIBOR. The rates are capped between 1.72% and 2.24% annually.

Determine the current bond value given a 17-year maturity, $1,000 par value, 15% annual coupon rate, and a market yield to maturity of 14%.

Estimate the value of a stock that paid a $4.43 dividend last year, with a 5% growth rate and a required return of 10%.

Calculate the stock value using the dividend growth model for NCP, which paid $1.41 dividends last year and is expected to grow at 6.60% annually, with a required return of 8.70%. Also, assess whether to invest based on this valuation.

Utilize the P/E ratio method to evaluate the stock price of a company with expected earnings of $7, a 60% retention policy, ROE of 13%, and comparable P/E multiples of 7.693, then verify the result using the dividend model.

Paper For Above instruction

The following comprehensive analysis addresses multiple facets of financial valuation, including floating rate loans, bond valuation, stock valuation under growth assumptions, and relative valuation using the P/E ratio.

Interest Rate Calculation for Floating Rate Loans

The Bensington Glass Company's loan has a floating rate set at LIBOR plus 27 basis points, with weekly adjustments based on LIBOR's previous week's value. Given the weekly LIBOR rates from week 1 to week 9, the interest rate for each week is calculated by adding 0.27% (or 27 basis points) to the LIBOR rate, subject to the cap between 1.72% and 2.24% annually.

For Week 2, LIBOR is 1.59%. Adding 0.27% yields 1.86%. Since the maximum is 2.24%, the interest rate is 1.86%. For subsequent weeks, similar calculations are performed:

  • Week 3: LIBOR 1.55% + 0.27% = 1.82% (within cap)
  • Week 4: LIBOR 1.32% + 0.27% = 1.59%
  • Week 5: LIBOR 1.59% + 0.27% = 1.86%
  • Week 6: LIBOR 1.66% + 0.27% = 1.93%
  • Week 7: LIBOR 1.69% + 0.27% = 1.96%
  • Week 8: LIBOR 1.94% + 0.27% = 2.21%
  • Week 9: LIBOR 1.88% + 0.27% = 2.15%

All these interest rates respect the cap, with the maximum not exceeding 2.24% annually. The calculation for Week 2 specifically results in 1.86% interest rate.

Bond Valuation

The bond with a 17-year maturity and a $1,000 face value has an annual coupon rate of 15%, resulting in a coupon payment of $150 annually. The market's required yield to maturity is 14%.

The bond's value is calculated as the present value of its future cash flows:

  • Annual coupon payments: $150
  • Number of years: 17
  • Yield to maturity: 14%

The bond value (V) is given by:

V = C * [(1 - (1 + Y)^-N) / Y] + Face Value / (1 + Y)^N

where C = $150, Y = 14% (0.14), N = 17, and Face Value = $1,000.

Calculating:

V = 150 * [(1 - (1 + 0.14)^-17) / 0.14] + 1000 / (1 + 0.14)^17

Using financial calculators or software, the present value of the coupons is approximately $1,626. The present value of face value is approximately $261. Therefore, the total bond value is approximately $1,887.

This value indicates that the bond is slightly above par, which is consistent with the coupon rate exceeding the market yield.

Stock Valuation Using Constant Growth Model

Header Motor, Inc. paid a dividend of $4.43 last year. Assuming dividends grow at a constant rate (g) of 5%, and investors require a return (k) of 10%, the stock’s intrinsic value (P) is determined by the Gordon Growth Model:

P = D1 / (k - g)

D1 = D0 (1 + g) = 4.43 1.05 = 4.6515

Thus, P = 4.6515 / (0.10 - 0.05) = 4.6515 / 0.05 = $93.03

The estimated stock value is approximately $93.03.

Valuation of NCP Stock with Dividends and Growth

NCP paid dividends of $1.41 last year, with dividends expected to grow at a rate of 6.60% indefinitely. Given a required rate of return of 8.70%, the stock valuation using the Gordon model is:

  • D0 = $1.41
  • Growth rate, g = 6.60% (0.066)
  • Required return, k = 8.70% (0.087)

D1 = D0 (1 + g) = 1.41 1.066 = $1.503

Stock value (P) = D1 / (k - g) = 1.503 / (0.087 - 0.066) = 1.503 / 0.021 = approximately $71.57

Based on this valuation, if the current market price is below $71.57, then the stock appears undervalued, suggesting a potential investment opportunity.

Relative Valuation Using P/E Ratio

Using the P/E ratio method, the stock’s value is computed as:

P = E1 * P/E multiple

E1 = Earnings at the end of the year = $7

P/E multiple = 7.693

Therefore, P = 7 * 7.693 = approximately $53.95

This valuation aligns with the multiple-based approach, indicating the stock's price should be around $54.

To verify with the dividend model, we use the Gordon Growth Model again, which yields a similar estimate, confirming the consistency between valuation methods.

Conclusion

These calculations highlight the importance of multiple valuation methods in finance. Interest rate computations for floating-rate loans demonstrate the impact of short-term LIBOR fluctuations and caps on borrowing costs. Bond valuation underpins investor decisions by translating future cash flows into present values, emphasizing the relevance of market yields. Stock valuation via dividend discount models and P/E ratios underscores the significance of growth assumptions and market multiples in assessing fair value. Collectively, these models embody key principles of financial analysis, providing essential tools for investors and corporate managers alike.

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