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Essay / Research Paper Abstract
This 5 page paper looks at a case study supplied by the student and values the securities on the balance sheet; the loan, the bonds and the common stock, using present value, net present value, yield to maturity, dividend discount model and CAPM. The bibliography cites 3 sources.
Page Count:
5 pages (~225 words per page)
File: TS14_TErondo2.rtf
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Unformatted sample text from the term paper:
is after discounting for the time element of the money. The loan was taken out at 6% but it appears that interest rates have changed since that date. We
are not told the new interest rate, but if we look at other securities there is a bond for 8% so we will assume that since the loan was taken
out the interest rate has increased to 8%. The first stage of calculating the present value is to assess the level of repayments and interest payable in any year.
For this we will average the value of the loan for each year and take the interest at 6% on the average outstanding amount on the loan. This can then
be added to the capital repayments which appears to be set at 2,500,00 each year. Table 1 Repayment schedule for the bank loan with 8% discount factor Loan
outstanding at beginning of period At end of period Average loan 6% interest Repayment of capital Total repayment 2005 7,500,000 5,000,000 6,250,000 375000 2,500,000 2875000 2006 5,000,000 2,500,000 3,750,000
225000 2,500,000 2725000 2007 2,500,000 0 1,250,000 75000 2,500,000 2575000 Total repayments 300000 5000000 8175000 This gives us the repayment to use in the valuation schedule. Now we
take the full repayment level and discount these by the current interest rates (Elliott and Elliott, 2005). With each year discounted and then added together we can deduce the amount
that is outstanding and find the real value of the loan to the bank. Table 2 Present Value discounted at 8% Year Total payment Discount factor Present value Accumulative
value 2005 2875000 0.926 2,662,037 2,662,037 2006 2,725,000 0.857 2,336,248 4,998,285 2005 2,575,000 0.794 2,044,118 7,042,403 Less outstanding capital 7,500,000 Present value -457,597 If we look at
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