1) Altria Group Inc. (MO)
Compare valuation of bonds issued by Altria and common stock of Altria Group Inc. Determine the general connection between valuation of the firm’s debt and same firm’ s equity? Or we can say how does YTM on the bonds relate to discount rate utilized to value the shares?
Let’s use bond CUSIP 02209SAR4.
We must work in Excel. Contrast the promised cash flows of bond with expected cash flows of common shares. Let’s construct the spread sheet that shows the range of possibilities for common stock value. We must suppose that present price of both the bonds and common shares of Altria are honestly priced.
Variables for common stock valuation are growth rate in dividends, discount rate and current dividend. You must pick a very long horizon.
A excellent way to start is:
i) Suppose dividend of Altria grows at the same rate as in past.
ii) Suppose that discount rate for valuing shares is YTM of the bonds plus some margin.