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 SLP 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.
Given the concepts of the time value of money, answer the following questions in a two to three page paper:
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 this part. 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 show your work.
3) Pick two other companies in the same industry as your SLP company. One should be one that you would pay less for a $100,000 bond than you would from your SLP company and another one that you would pay more for a $100,000 bond from your SLP company. Explain why you would pay more or less for their bonds.
To answer questions 1, 2, and 3 please include the followings in your
●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
►The above factors/ratios will help you to decide
the discount rate that you will use to calculate bond prices. You can
find the above information by using the website http://ca.finance.yahoo.com/. For
example, you want to use General Electric Company. You will need to key in
company code “GE” and then click on “Key Statistics” (http://ca.finance.yahoo.com/q/ks?s=GE).
You will be able to find all the ratios and beta of the company.
4) What do you perceive you have learnt in Module 2 SLP? Which
of the following learning objectives do you feel you have mastered?
☼Identify factors that determine present value
☼Understand and discuss the concepts of present and future value
Please provide your evaluation of the Module 2 SLP in
NOTE: Please note that your report/assignment will not be
accepted without proper citations and references. You must use the sources from
the background material together with the sources you find your own. It is also
REQUIRED that you answer all the questions related to learning
Session Long Project (SLP) Expectations:
In Module 2 SLP, you are expected to:
►Describe the purpose of the paper and conclusion. An introduction and
conclusion are important because many busy individuals in the business
environment may only read the first and the last paragraph. If those paragraphs
are not interesting, they never read the body of the paper.
►Answer the SLP questions clearly and provide necessary details. Also please
review Tips for Good Writing [https://cdad.trident.edu/CourseHomeModule.aspx?course=56&term=92&module=3&page=custom1]
and a guideline [http://www.trident.edu/Media/Default/pdf/Well-Written-Paper.pdf] to
write a well-structured paper.
►Provide a quality argument; that is, no poor sentence structure, no spelling
and grammar mistakes or run-on sentences.
►Provide citations to support your argument and references on a separate
page. Please use APA format to provide citations and references [http://owl.english.purdue.edu/owl/resource/560/01/].
►Answer all the SLP questions in an essay format instead of point format.
Please do not type questions in the paper.
►Type and double space the paper.
●The following criteria will also be used to assess your paper:
>Precision: Does the paper address the question(s) or
>Breadth: Is the full breadth of the subject, i.e., all
the keys to the assignment, addressed?
>Depth: Does the paper/report address all elements of the
topic in sufficient depth? Does it include and apply the background readings and
other background resources? Are they included as references?
>Critical thinking: Are the concepts of this module
applied accurately, logically, and relevantly?
>Organization: Is the paper organized in a coherent and
systematic manner? Are headings included in all papers greater than 2 pages?
>Clarity: Is the writing clear and the concepts
articulated properly? Are paraphrasing and synthesis of concepts the primary
means of response to the questions, or are thoughts conveyed through excessive
use of quotations?
Finally, this paper will be graded with the following criteria in mind:
A. Provide a direct answer to all three assignment questions, focus only on
these three questions.
B. Reference all of your sources of information, both within the text as well
as with a bibliography at the end.
C. For all calculations, show all of your work and demonstrate that you
understand the steps.