STOCKS AND BONDS<\/p>\n
Stock Valuation<\/p>\n
Mr. Hillbrandt is impressed with your ability to explain financial concepts so he asks for help with learning about stock valuation. Mr. Hillbrandt really liked the examples you provided last time (module 1), so it seems as if you need to sit down and create some relevant examples for this topic too. Below is some information that helps you brush up on the topic.<\/p>\n
Read this article related to the intrinsic value of stock, paying special attention to the section entitled \u201cConstant Growth Model\u201d:<\/p>\n
Alvarez, S. (2015). What is the intrinsic value of stock? Investopedia. Retrieved fromhttp:\/\/www.investopedia.com\/articles\/basics\/12\/intrinsic-value.asp<\/p>\n
Now, let\u2019s work the following problem:<\/p>\n
A company just paid an annual dividend of $2.00 per share. Dividends are anticipated to grow at a rate of 8% per year forever. The stock\u2019s beta is 1.5, the risk-free rate is 2.5%, and the expected return on the overall stock market is 7.5%. What\u2019s the intrinsic value of the company\u2019s common stock?<\/p>\n
Using the formula:<\/p>\n
Stock Price = D1 \u00f7 (k \u2013 g)<\/p>\n
Where:<\/p>\n
D1 = dividend for the coming year<\/p>\n
k = required rate of return (NOTE: k must be greater than g)<\/p>\n
g = growth rate of dividends<\/p>\n
(Note: Decimals and not percentages must be used for the model to work)<\/p>\n
1) To calculate the dividend for the coming year, we need to multiply the last dividend by the expected dividend growth rate. And so:<\/p>\n
D1 = $2.00 x 1.08 = $2.16<\/p>\n
2) Find the Market risk premium using the following formula:<\/p>\n
Market risk premium = Expected return on stock – Risk free rate<\/p>\n
= 7.5% – 2.5%<\/p>\n
= 5%<\/p>\n
3) Then, to find k, or the required rate of return, use the following formula:<\/p>\n
k = risk free rate + [market risk premium x beta]<\/p>\n
= 2.5% + (5% * 1.5)<\/p>\n
= 10%<\/p>\n
4) g = 8% (or 0.08) growth rate of dividends<\/p>\n
5) Stock Price = D1 \u00f7 (k \u2013 g)<\/p>\n
= $2.16 \u00f7 (.10 – .08)<\/p>\n
= $2.16 \u00f7 .02<\/p>\n
= $108.00 (ANSWER)<\/p>\n
5) Check your answer with this online calculator:http:\/\/www.zenwealth.com\/businessfinanceonline\/SV\/CGStockCalculator.html<\/p>\n
Now, work the following problems:<\/p>\n
A company just paid an annual dividend of $3.25 per share. Dividends are anticipated to grow at a rate of 5% per year forever. The stock\u2019s beta is 1.2, the risk-free rate is 3.5%, and the expected return on the overall stock market is 5.5%. What\u2019s the intrinsic value of the company\u2019s common stock? ANSWER = $379.17<\/p>\n
A company just paid an annual dividend of $2.35 per share. Dividends are anticipated to grow at a rate of 6.25% per year forever. The stock\u2019s beta is 1.6, the risk-free rate is 4.25%, and the expected return on the overall stock market is 8.5%. What\u2019s the intrinsic value of the company\u2019s common stock? ANSWER = $51.48<\/p>\n
Required:<\/p>\n
Part I consists of three questions.<\/p>\n
Do the computations for the example below. Show the computations step by step, so Mr. Hillbrandt can easily follow your examples.<\/p>\n
1. The company\u2019s common stock dividends are anticipated to grow at a constant 5.5% growth rate per year going forward. The company just paid an annual dividend (that is, D-zero) of $3 per share. What\u2019s the intrinsic value of the stock based on the following required rates of return?<\/p>\n
6%<\/p>\n
8%<\/p>\n
10%<\/p>\n
12%<\/p>\n
2. If the stock is currently selling for $40 per share, is the stock a good buy? Interpret the results and justify your decision.<\/p>\n
3. The company just paid an annual dividend of $1.50 per share. Dividends are anticipated to grow at a stable rate of 10% per year forever. The stock\u2019s beta is 1.2, the risk-free rate is 4%, and the expected return on the overall stock market is 11%. What is the intrinsic value of the company\u2019s common stock?<\/p>\n
Part II<\/p>\n
Select one company that is a member of the Dow Jones Industrial Average. The listing is here:<\/p>\n
http:\/\/finance.yahoo.com\/q\/cp?s=^DJI+Components<\/p>\n
Apply the Dividend Discount Model and justify why you think that the stock is currently undervalued, overvalued, or fully valued. Please be sure to state your assumptions and justify your results. What is the relationship, if any, between stockholders\u2019 wealth and financial decisions?<\/p>\n
Computations (use Excel).<\/p>\n
Use Excel to make the part I and II computations. Make sure you separate the two parts and organize the information, so Mr. Hillbrandt easily understands.<\/p>\n
Memo (use Word).<\/p>\n
Explain the concept and computations in part I to the CEO. Start with an introduction and end with a conclusion. Each of the four or five paragraphs should have a heading.<\/p>\n
Short Essay – Part II (use Word).<\/p>\n
Let\u2019s look at this issue from an investor\u2019s perspective and respond to the question above. Do research as needed and respond to the questions posed in part II.<\/p>\n
Start with an introduction and end with a summary or conclusion. Use headings. Don\u2019t forget to reference your sources. Maximum length of two pages.<\/p>\n
Assignment Expectations<\/p>\n
Each submission should include two files: (1) An Excel file; and (2) A Word document. The Word document shows the memo first and short essay last. Assume a knowledgeable business audience and use required format and length. Individuals in business are busy and want information presented in an organized and concise manner.<\/p>\n","protected":false},"excerpt":{"rendered":"
STOCKS AND BONDS Stock Valuation Mr. Hillbrandt is impressed with your ability to explain financial concepts so he asks for help with learning about stock valuation. Mr. Hillbrandt really liked the examples you provided last time (module 1), so it Read More …<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-144427","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/144427","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/comments?post=144427"}],"version-history":[{"count":0,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/144427\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/media?parent=144427"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/categories?post=144427"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/tags?post=144427"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}