Case Study Essay

4720 Words Sep 1st, 2012 19 Pages
De La Salle Professional Schools Inc.

Peachtree Securities, Inc. (B) A Case Analysis

Submitted to: Prof. Benel Lagua

In Partial Fulfillment of the Course Requirement In Financial Management

Submitted by: Cheng, Cindie Domo-ong, Kathleen Mendoza, Elissa Santos, Ana Liza Group 4 August 28, 2010

After a successful lecture on risk and return, Laura Donahue, a recently hired utility analyst for Peachtree Securities, Inc., was tasked by its president, Jack Taylor, to determine the value of TECO Energy’s securities (common stock, preferred stock and bonds) and then conduct a seminar to explain the process to the firm’s customers. To do this, Laura first reviewed the Value Line Investment Survey data and examined TECO’s latest
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Coupon Interest Rate = Coupon Payment Par Value

2c. What is the effective annual yield to maturity (YTM) on each issue?



Effective Annual Yield = ((1 + semiannual YTM)2)-1

2d. In comparing bond yields with the yields on other securities, should the nominal or effective YTM be used? Explain. • The most important rate of return indicator is a bond's yield to maturity. The YTM factors in everything to give the true overall yield to an investor. It examines the nominal yield, current yield and years to maturity. The overall rate of return can be effected by the length of time the bond is held. 3. Suppose TECO has a second bond with 25 years left to maturity (in addition to the one listed in Table 1), which has a coupon rate of 7 3/8 percent and a market price of $747.48 3a. What is the (1) nominal yield and (2) the effective annual YTM on this bond?

3b. What is the current yield on each of the 25-year bonds?



Current Yield = Annual Dollar Interest Paid Market Price

3c. What is each bond's expected price on January 1, 1994, and its capital gains yield for 1993, assuming no change in interest rates? (Hint: remember that the nominal required rate of return on each bond is 10.18%)



The capital gains yield will be the change in price divided by the original (purchase) price. Computed as Capital Gains Yield = (Ending Price-Beginning Price)/Beginning Price

3d. What would

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