Given the concepts of the time value of money, answer the following:
1. How much would you pay for this bond today? Take into consideration your own personal risk preferences, interest rates, inflation, and the probability your company (Procter and Gamble) will not be able to pay you back in one year. Note: You do not need any math equations for this part; just describe how much you would personally pay for a $100,000 bond from this company.
2. Based on your answer to the previous problem, what would be your discount rate for this bond? Use the present value formulas from the background materials and show your work.
3. Pick two other companies in the same industry as your (Procter and Gamble) company. Pick one that you would pay less for a $100,000 bond than you would for your (Procter and Gamble) company's bond, and another that you would pay more for a $100,000 bond you would for your (Procter and Gamble) company's bond. describe why you would pay more or less for their bonds.
To answer problems 1, 2, and 3, include the following:
Total debt/equity ratios of all three companies. (Note that the higher the debt, the higher the default risk.)
Profit margin, return on assets, and return on equity ratios of all three companies. (Remember your bond payment will depend on the profit margin and cash flow of the company.)
Betas of all three companies. (Note that the higher the beta, the higher the risk; the higher the risk, the higher the discount rate.)
Explanation on the riskiness of all three companies in brief (e.g., the higher the beta, the higher the risk).
Current ratio and quick ratio of all three companies
The above factors/ratios will help you to decide the discount rate that you will use to find out bond prices. You can find the above information by using the website http://finance.yahoo.com/. For ex, you want to use General Electric Company. You will need to key in company code "GE" and then click on "Key Statistics" (http://finance.yahoo.com/q/ks?s=GE). You will be able to find all the ratios and beta of the company.