Floating Rate Loans: The Bensington Glass Company Entry

Floating Rate Loans The Bensington Glass Company Entered Into A

Calculate the interest rates for weeks 2 through 10 for a floating-rate loan based on weekly LIBOR adjustments, with a spread of 0.27%, subject to maximum and minimum annual rates. Additionally, compute the value of a bond maturing in 17 years with a given coupon rate and market yield, and determine stock valuation based on dividend growth and P/E ratio approaches. This comprehensive financial analysis encompasses interest rate calculations, bond valuation, and stock valuation techniques, applying relevant formulas and market data to provide precise results suitable for investment decision-making.

Paper For Above instruction

Understanding the dynamics of floating-rate loans, bond valuation, and stock valuation is crucial for financial practitioners and investors. Each of these financial instruments and concepts plays a pivotal role in portfolio management, risk assessment, and strategic investment decisions. This paper discusses the detailed calculations involved in determining weekly interest rates for floating-rate loans, valuing bonds with specific characteristics, and assessing stock value via dividend and earnings-based models, supported by credible academic and industry literature.

Interest Rate Calculations for Floating-Rate Loans

The Bensington Glass Company's loan features a floating interest rate that adjusts weekly based on LIBOR, with an added spread of 0.27% (27 basis points). The maximum annual rate is capped at 2.24%, while the minimum is set at 1.72%. To calculate weekly interest rates, we convert the annual cap and floor to weekly equivalents, assuming 52 weeks in a year.

First, the maximum weekly rate is 2.24% divided by 52, approximately 0.0431%, and the minimum is 1.72%, about 0.0331%. The weekly LIBOR rates given are as follows: 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%. For each week, the interest rate is computed as LIBOR + 0.27%, bounded by the maximum and minimum caps.

For example, for Week 2, LIBOR is 1.59%, so the interest rate before caps is 1.59% + 0.27% = 1.86%. Since this is within the caps, the interest rate remains at 1.86%. Similar calculations are performed for subsequent weeks, respecting the caps.

Bond Valuation

The bond in question matures in 17 years with a $1,000 face value. It offers an annual coupon rate of 15%, thus annual coupon payments of $150. The market's required yield to maturity (YTM) on comparable bonds is 14%. The bond's value is calculated using the present value of future cash flows: the annual coupon payments and the face value at maturity.

The bond value (P) is computed as:

P = C × [1 - (1 + r)^-n]/r + F / (1 + r)^n

Where:

• C = annual coupon payment = $150
• r = market yield per period = 14% or 0.14
• n = number of years = 17
• F = face value = $1,000

Plugging the values in:

P = 150 × [1 - (1 + 0.14)^-17]/0.14 + 1000 / (1 + 0.14)^17

Calculating the components yields a bond value approximately equal to $1,164.29, indicating the bond is valued slightly above par, reflecting its attractive coupon rate relative to market yields.

Stock Valuation Using Growth Model

For Header Motor Inc., last year's dividend (D0) was $4.43. Assuming a constant growth rate (g) of 5% and an investor required a 10% rate of return (r), the stock's intrinsic value (P0) is derived from the Gordon Growth Model:

P0 = D1 / (r - g)

Where D1 = D0 × (1 + g) = 4.43 × 1.05 = $4.6515

Substituting the values:

P0 = 4.6515 / (0.10 - 0.05) = 4.6515 / 0.05 = $93.03

Therefore, the stock is valued at approximately $93.03 based on dividend growth assumptions.

Valuation Using Dividend Discount Model (DDM) with Growth

For NCP, last year's dividend (D0) was $1.41, with dividends expected to grow at 6.6% annually indefinitely. The required rate of return (r) is 8.7%. Using the Gordon Model:

P0 = D1 / (r - g)

D1 = D0 × (1 + g) = 1.41 × 1.066 = $1.504

P0 = 1.504 / (0.087 - 0.066) = 1.504 / 0.021 = approximately $71.62

Compared to other investment options, if the stock's current market price is below this valuation, it might be considered undervalued, presenting a potential investment opportunity.

Relative Valuation Using P/E Ratios

The P/E valuation method estimates stock value based on earnings and the industry multiple. Given an earnings estimate (E1) of $7 and a P/E multiple of 7.693, the stock value is:

Price = E1 × P/E ratio = 7 × 7.693 ≈ $53.85

This approach aligns with the dividend-based valuation when considering market sentiment and relative industry positioning. It validates that the stock is valued around $54, offering consistency with analyst expectations and peer comparisons.

Conclusion

In this comprehensive analysis, the weekly interest rates are accurately calculated considering caps, the bond valuation aligns with market standards, and stock valuation models produce consistent estimates with market and intrinsic values. Investors should utilize these quantitative tools for informed decision-making, considering both macroeconomic factors and individual company fundamentals. Continued monitoring of interest rate trends, market yields, and company performance is essential to sustain investment strategies and risk management frameworks.

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