Question: Finance is all about valuation-how to estimate asset values and what to do to increase them. We develop and use Excel models throughout the book.

Finance is all about valuation-how to estimate asset values and what to do to increase them. We develop and use Excel models throughout the book. We start that process in this chapter with simple models used to value bonds, stocks, and capital budgeting projects. Working through the model will give you a refresher in valuation plus a refresher on (or preview of) Excel. The model can be accessed on the textbook’s Web site under the “Chapter Models” section. If you have never used Excel at all, then you should not attempt to use it to help answer this question, or if you do, you should not get frustrated if you have trouble.

a. Explain how to find the value of a bond given the rate of interest it pays (its coupon rate), its par value (assume $1,000), and the going rate of interest on bonds with the same risk and maturity.

b. Explain how to find the value of a stock given its last dividend, its expected growth rate, and its required rate of return.

c. Explain how to find the value of a capital budgeting project given its cost, its expected annual net cash flows, its life, and its cost of capital.

d. In each of the above cases, discuss how changes in the inputs would affect the output. Would it matter if the outputs were highly sensitive to changes in the inputs?

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