Bond and Stock Performance Analysis
OBJECTIVE
In this part of the project you are to assume to have been hired to join a team serving as an internal financial analyst to THE COMPANY. Your client plans to invest in bonds and (or) stocks issued by THE COMPANY (SELECTED BY INSTRUCTOR). In part 3 of the assignment you are asked to provide some recommendations to THE COMPANY’S management.
THE COMPANY for this project s Microsoft Corp. THE COMPANY for this part of the project must have bonds listed on the website http://finra markets.morningstar.com/Bond Center/ Default.jsp. To find the information on bonds, click on Search in the middle of the screen (under Market Center Bond Guide), under Quick Search type the Issuer Name and the Symbol, and click SHOW RESULTS.
Alternatively, you can request approval of another publicly traded company. This request must be submitted before the end of the first week of the course. The request must include
- identification of the company by ticker symbol and name
- a reasonable and appropriate explanation of why you want to examine the alternative company
- the source of the analyst’s report that will be used in the analysis (which must be submitted to me)
- acknowledgement by you that all the specific elements of the assignment (see below) will be prepared by you and included in the final research project report
SUGGESTED WEBSITES
www.morningstar.com – To find the information for your company you need to type the stock symbol in the Quotes window to get into the company’s page.
http://finra-markets.morningstar.com/BondCenter/Default.jsp – To find the information on bonds, click on Search in the middle of the screen (under Market Center Bond Guide), under Quick Search type the Issuer Name and the Symbol, and click SHOW RESULTS.
https://markets.businessinsider.com/bonds. To find the information on bonds, scroll down the page, type the name of the company in the window under Bond Finder, and click SEARCH.
www.marketwatch.com -To find the information for your company you need to type the stock symbol in the Search window to get into the company’s page.
www.money.cnn.com -To find the information for your company you need to type the stock symbol in the Search window to get into the company’s page.
www.finance.yahoo.com – To find the information for your company you need to type the stock symbol in the Search window to get into the company’s page.
www.nyse.com – Click on Data, then click on Stocks (under Quotes), and type the name of the company or the stock symbol in the window “Keyword or symbol” to get into the company’s page.
www.nasdaq.com – To find the information for your company you need to type the stock symbol in the Search window to get into the company’s page.
Microsoft Website
PRESENTATION OF PAPER AND WRITING
Organization, Format and Presentation of Paper including the Title page, Introduction, Body, and Summary. Each section of the paper must begin with a sub-heading. Please use the sub-headings included in the assignment
Use of Tables, Figures and Other Graphics to Summarize and Support Analysis Presented in the Paper
Logical and Smooth Flowing Transitions and Relationships among Sections of the Written Report
Research Sources and Significance of Research Information and Data, Use of APA Citation Methodology
ASSIGNMENT
Using the information from the websites develop evaluation of bond and stock performance for Microsoft Corp.
1) Collect and evaluate the data about bond performance of the assigned company.
The information on bonds can be found on the website http://finra-markets.morningstar.com/BondCenter/Default.jsp. To find the information on bonds, click on Search in the middle of the screen (under Market Center Bond Guide), under Quick Search type the Issuer Name and the Symbol, and click SHOW RESULTS.
Another useful website on bond information is https://markets.businessinsider.com/bonds. To find the information on bonds, scroll down the page, type the name of the company in the window under Bond Finder, and click SEARCH.
Copy the quotations of two bonds issued by THE COMPANY (SELECTED BY INSTRUCTOR) that contain the Price. Present these quotations in your project.
- Assume that par value of the bond is $1,000. What were the last prices of the bonds in $$$ (listed in the Price column)? Show your work in your project.
- Assume that par value of the bond is $1,000. Calculate the annual coupon interest payments. Show your work in your project.
- Assume that par value of the bond is $1,000. Calculate the current yield of the bonds. Show your work in your project.
- Write a 1-2 page of the analysis of the bonds. In your analysis you should answer the following questions. Please explain your answer to each question.
- How much is the YTM listed in quotations is for the bonds? Explain the meaning of YTM.
- If you are going to buy a bond issued by THE COMPANY, which bond would you choose? Why?
- Are these bonds callable? If the bonds that you chose are callable (non-callable), will it change your decision to buy them?
- If you are an investor who is looking for a bond to invest in, are you going to buy a bond that you chose? Take a look at the balance sheet and income statement of the company. What data or ratios support your decision to buy this bond or not? You may want to incorporate the results of the Research Project Part 1, as well as the results of the financial leverage ratios to answer this question. You should develop a specific recommendation, with supporting rationale to explain your answer.
2) Collect and evaluate the data about stock performance of the assigned company for the last one year.
1) Apply the Capital Asset Pricing Model (CAPM) Security Market Line to estimate the required return on THE COMPANY stock. Note that you will need the risk-free rate and the market return. Show this information in your project.
I) Apply the Capital Asset Pricing Model (CAPM) Security Market Line to estimate the required return on stock. Note that you will need the risk-free rate, beta, and the market return.
a) To get the current yield on 10-year Treasury securities go to www.finance.yahoo.com -click on Markets – U.S. Treasury Bonds Rates. You will use the current yield on 10-year Treasury securities as the risk-free rate to estimate the required rate of return on stocks. Discuss how appropriate this rate is as a measure of risk.
b) The market risk premium adjusted for COVID-19 is estimated as 5.35%. What does it mean “market risk premium”?
c) Beta is listed in www.finance.yahoo.com and in www.morningstar.com on the company’s front page. What is the beta listed for the company? What does it mean?
d) Calculate the required return on the stock using the Capital Asset Pricing Model (CAPM) Security Market Line. Please show your work.
II) There are several methods how to calculate the growth rate. One of the possible ways is to calculate the sustainable growth rate as g = ROE *(1- Dividend payout ratio). You can find ROE and the Dividend Payout Ratio on www.morningstar.com > Company’s page – under Financials and under Dividends
Calculate the company’s sustainable growth rate. Please show your work.
III) Apply the Gordon model (constant growth rate model) to calculate the intrinsic (economic) value of the stock. Please show your work.
Please note that for some companies it is not possible to use the Gordon model. If that is the case, please explain why it is not possible to use this model for your company. What other models is it possible to use?
IV) Compare the result of your calculations with the current stock price. Is the stock overvalued, undervalued, or properly valued? Why? In accordance with your findings, is it reasonable to buy the stock? Why? Please explain your answer.
3) Develop a specific recommendation, with supporting rationale for the COMPANY’S management – Think about the financial strategy of the company, how to best balance THE COMPANY’S financial leverage to optimize shareholder wealth going forward taking into consideration the company’s current market position, credit rating, dividend policy, etc.
4) Reflection – the students should write a paragraph in their own words reflecting on what they learned from the assignment and how they think they could apply what they learned in the workplace.
