ITech Geek is not familiar with the mechanics of corporate bond valuation. They are interested in the fact that bond prices converge to their PAR value as the date to maturity nears. Explain this concept to ITech Geek management.

Project Questions

All questions are equally weighted

Our client ITech Geek has several questions for us to answer as their consultant firm concerning valuation, which cash flows matter, the calculation of these cash flows, convergence to a perpetuity, and bond pricing, among others. These are outlined below.

Question 1

ITech Geek is a publicly traded technology company and has 5,000,000 shares outstanding. Their marginal tax rate of 30%. Assume ITech Geek plows-back 60% of its net income into retained earnings.

First, you are to create the necessary Balance Sheets and Income Statement (create own numbers for these two off what is provided in the question) and then calculate the annual Cash Flow from Assets ) for ITech Geek. A constraint here, however, is that your CFFA must range between $20,000,000 and $24,000,000 annually. Second, assuming ITech Geek’s annualized WACC is 8% and its annualized CFFA are growing at 5%, you are to estimate the current value of ITech Geek.

Question 2

ITech Geek is not familiar with the mechanics of corporate bond valuation. They are interested in the fact that bond prices converge to their PAR value as the date to maturity nears. Explain this concept to ITech Geek management.

Question 3

We have often discussed the formulas for the present value of a perpetuity and the present value of an ordinary annuity:

(I)
(II)

With and . We know that converges to as n approaches. ITech Geek management is confused about this concept. Illustrate to ITech Geek management that this is so and why is it important in terms of valuation.

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