Calculate bond prices for each debenture

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Assignment: Case Study -Bond and Stock Valuation

Caterpillar Inc. generates a lot of cash from operations. They have a current cash policy of maintaining a strong financial position to support their credit rating, provide capital for growth, appropriately fund employee benefit plans, pay dividends and repurchase stock.

They want to maintain their long-term debt-to-capital ratio below 50%.

They invest annually about $1B in capital expenditures.

They fund approximately $500M per year contributions to the pension plan.

The dividend per year has increased every year but the rate of increase has declined from 16.4% to 1% and back up in 2018 to 8% growth year over year. Their current dividend yield is about 2.6%.

The company purchased $3.8B of its own stock in 2018. Starting January 1, 2019 a new $10B buyback has been announced.

Long-term Debt equals $30.8B with $5.8B to be paid within the next year.

You've been asked to make recommendations as to whether the company should spend its free cash flow on paying higher dividends, retiring debt (buy back bonds), or to use the funds to repurchase stock.

You will need to forecast the growth of the company for the next 3 years and then use a standard rate of growth until perpetuity by using industry information. The global construction equipment is supposed to grow from $69.8B to $99.3B from 2020 to 2024. Calculate the CAGR and use this as your long term growth rate.

Assumptions:

Inflation will stay flat.

Interest rates will increase .5% every year.

The company will only buy back stock if it is undervalued.

Only bond issues listed on the front page of the 10K are to be considered for retirement of debt.

That the cash flow per share will be the free cash flow of Caterpillar Inc.

To do the analysis first calculate the current value of the stock using 2018 ROE and plowback ratio. Then calculate the current value of the stock using the discounted dividend method with a market required return of 12% and the EPS growth rates from 2019 to 2021 and the industry growth rate from 2021 on to calculate the future dividends. A horizon value must be calculated. Compare these 2 values to the currently traded stock price average over the last 10 days.

Look up Caterpillar Inc. bonds. Only do the analysis on the 3 bond issues listed on Caterpillar's 10K front page. If interest rates increase every year assume the current yield to maturity will increase by the same amount every year. Calculate bond prices for each debenture from 2019 through 2021 to see if retirement would make sense. Consider all factors.

Create a table with historical and projected dividends through 2021. Calculate the growth rate. Compare this to EPS and net income growth rate. Make your recommendations on future dividends.

All recommendations need to be supported.

All analysis is to be done on an excel sheet. One workbook is to be submitted.

Use 2 decimal format and $ and % where appropriate.

Note - It's a corporate finance case study to be done on excel. Need report of 2 pages

Attachment:- Case Study.rar

Reference no: EM132231176

Reviews

len2231176

2/10/2019 8:58:00 PM

Instructions: It’s a corporate finance case study to be done on excel. Most of the information is said on the case, but there is some information to be collected online. I don’t know how start and put the things on excel. So I would like a model of my case on excel. Need report of 2 pages. All recommendations need to be supported. All analysis is to be done on an excel sheet. One workbook is to be submitted. Use 2 decimal format and $ and % where appropriate. Cite plug in numbers. It will be formatted for easy reading and understanding. Make sure you support your recommendation.

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