Time Value of Money is one of the most important concepts in the financial world. The principles of time value analysis have many applications, ranging from setting up schedules for paying off loans to decisions about whether to acquire new equipment for a company. Time value of money is also called discounted cash flow analysis.
Your task for this module is to apply the concept of present value to your chosen company.Suppose your company is selling a bond that will pay you $100,000 in one year from today.Keep in mind that if your company has financial difficulties in one year you might not get your full $100,000 back.Given that a dollar one year from now is always worth less than a dollar today, you most certainly would not pay a full $100,000 for this bond.
If you are highly risk averse or strongly prefer having money today to having money tomorrow, then you would pay significantly less than $100,000 for this bond.Higher inflation or high interest rates would also lead you to pay less for the bond.Also, the greater the chance of bankruptcy of your company the less you should be willing to pay for the bond.
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 will not be able to pay you back in one year.Note: no need for any math equations for thispart.Just explain how much you would personally pay for a $100,000 bond from this company.
2) Based on your answer to the previous question, what would be your discount rate for this bond-Use the present value formulas from the background materials and
3) Pick two other companies in the same industry as your other company (GOOGLE).One company should be one that you would pay less for a $100,000 bond than you would from the GOOGLE companyand another one that you would pay more for a $100,000bond from your GOOGLE company.
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Google
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Yahoo
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Amazon
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Total debt/equity ratios
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12.55
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1.04
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N/A
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Profit margin
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25.74%
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22.13%
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1.09%
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Return on assets
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10.90%
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3.36%
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2.46%
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Return on equity ratios
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19.04%
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8.81%
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7.66%
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Beta
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1.13
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0.9
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0.77
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Current ratio
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3.84
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3.04
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1.16
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Quick ratio
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5.92
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2.86
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1.17
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Explain why you would pay more or less for their bonds.
To answer questions 1, 2, and 3 please include the followings in your report:
-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 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