Stock valuation and bond issuance assignment
Instructions for Milestone #2
The following information should be used as you work on your Milestone #2 assignment. Several parts are as presented in the Worksheet in Module 4, however I also added some specific information about the historical prices for HD common stock (for Stock Valuation in section II) and HD bonds (for Bond Issuance in section III). Please answer all parts of the questions below for your term project on Home Depot.
Guidelines for Submission:
Your paper should be printed out and submitted as a 2-to-3-page Microsoft Word document, not including your calculations, in class next Monday, October 2. As noted above, do not complete Student Workbook for Sections II and III since some of these questions have been changed and additional information added. Use double spacing, 12-point Times New Roman font, and one-inch margins. Sources should be cited according to APA style.
II. Stock Valuation:
A. Use the data found on page 35 of HD’s 10-K (Consolidated Statements of Stockholders’ Equity) for the values of dividends for January 29, 2012, February 3, 2013, and February 2, 2014. Also, for each of those years, use the dollar value of Shareholders’ Equity (far right column for the years 2012, 2013, and 2014). For this part of your write-up:
1. What is the value of Stockholders’ equity for years 2012, 2013, and 2013?
2. Determine the dividend yield earned by investors in 2012, 2013, and 2014. To determine the dividend yield, suppose the market price of HD’s common stock was $38.07 per share in 2011; $60.21 in 2012, $75.82 in 2013, and finally $95.46 in 2013.
3. What was the capital gains yield for HD’s common stock in 2012, 2013, and 2014? Since the return earned by investors consists of dividend yield plus capital gains yield, what was the total return on HD’s stock for each of these three years?
Now, as with the assumption in the Milestone 2 instructions (that is, in II A.1), assume HD increases is dividend by $1.75 for the years 2012, 2013, and 2014 by $1.75. Now determine:
1. The new dividend yields for 2012, 2013, and 2014 based on the increased dividends and the actual prices given above.
2. Using your capital gains yield at the stock prices given above, what now is the total return on HD’s common stock for these three years based on the increased dividends?
3. Assuming HD doubled the number of shares outstanding (as suggested in II A.2), what do you think would happen to HD’s dividend yield and the total yield earned by its common shareholders? Note: You do not need to derive a specific value for this question, simply reason through (explain) what you think would happen to the dividend yield to total return to HD’s shareholders.
Hint: Think of what would happen to earnings per share (EPS) and then dividends per share (DPS) assuming HD doesn’t change their dividend payout ratio after the number of shares doubles.
B. Continuing with the original Milestone 2 questions, what effect would you expect each of the calculations you performed to have in terms of shareholder value? In other words, suppose the company’s goal is to maximize shareholder value. How will each of the situations support or inhibit that goal? Be sure to justify your reasoning.
C. To what extent do you feel the company’s dividend policies support or hinder their strategies? For example, if the company is attempting to grow, are they retaining and reinvesting their earnings rather than distributing them to investors through dividends?
III. Bond Issuance:
A. Assume that HD has 25-year bonds outstanding with a maturity value of M = $1,000. Assume as well that the coupon (or legal) rate on the bonds is 8%, payable semi-annually. If the current market rate (rd) on these bonds is 7% (or 3.5% semi-annually), what is the current market price of HD’s bonds?
Now calculate the following (as in III A.1 and III A.2):
1. The new value of the bond if overall market interest rates increased by 5% (so that the new market rate becomes 12% annually, or 6% semi-annually).
2. The new value of the bond if overall market interest rates decreased by 5% (so that the new market rate becomes 2% annually, or 1% semi-annually).
B. Based on the calculations you performed, what effect would you expect to occur in terms of the company’s decision to raise capital in this manner (i.e., selling additional bonds)? In other words, for each situation above, would you consider bond valuation to be a viable option for increasing capital? Be sure to justify your reasoning.
C. To what extent do you feel the company’s bond issuance policies support or hinder their strategies? For example, if the company is attempting to fund operating expenses, refinance old debt, or change its capital structure, are they issuing sufficient bonds to achieve these goals. Be sure to substantiate your claims.
Solution Preview
- Stock Valuation
- Use the data found on page 35 of HD’s 10-K (Consolidated Statements of Stockholders’ Equity) for the values of dividends for January 29, 2012, February 3, 2013, and February 2, 2014. Also, for each of those years, use the dollar value of Shareholders’ Equity (far right column for the years 2012, 2013, and 2014). For this part of your write-up:
- The value of stockholder’s equity
The value of stockholder’s equity =
The value of stockholders’ equity (2012) =
= $10.32
(1,102 words)