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Project I Example Fin 353

Economic Analysis

(THIS EXAMPLE IS COMPLETELY MADE UP. IT IS ONLY FOR VISUAL PURPOSES TO GET A BETTER IDEA HOW TO PREPARE YOUR ECONOMIC OUTLOOK PAPER.)

PART I

Figure 1: Growth in Business Loans

The growth in business loans is a leading economic indicator. Typically, a loan created today has an impact on the economy in the next 6 to 12 months. The current annual growth rate of commercial loans is 11% which is larger then the historical average of 7%. The current trend is also increasing which is a positive. Therefore, the commercial loan indicator is indicating healthy growth.

Figure 2: Yield Curve

The yield curve is flat which signifies a low growth environment or possible future recession.

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-20.00%

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-5.00%

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Growth in Business Loans

0 0.05

0.1 0.15

Yield Curve

Yield

Figure 3: M2 Growth Rate:

The money supply growth rate indicates where inflation and the economy are headed. Typically high money supply growth rate leads to economic growth. The current M2 growth rate is 5% which is equal to the four year moving average. The trend is going down but volatile so my go back up. The M2 growth rate indicates a neutral sign for the US economy.

Conclusion: After analyzing all seven indicators we forecast robust economic growth for the US economy. Interest rate date suggest __________. This means that _______. Growth in commercial and industrial loans suggest _______. This means________. The bid cover ratio suggests. This means investors do not want to buy Treasury securities which could lead to higher interest rates in the future.

(I have not included all the figures. Just a subset. Hopefully you get the idea of how to create an economic report. Present the analysis with the graphs and tables embedded in the document. Then conclude with a summary and discussion.)

(Go through what each indicator signals and develop the reasoning behind your forecast.)

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Part II:

1. The current stock price is $1,000 per share. The DDM model estimates the price to be $1,500 and the comparables model is $1,200. Therefore, the stock is undervalued.

a. Stock price based on DDM:

b. Stock price based on Comparables

2. Both sides of the equation are approximately equal meaning the put-call parity holds.

Variable Number Equation Source D1 g r DDM Price

Peer P/E P/BV P/S Peer1 Peer2 Peer3

Mean

Financial Item Stock Industry Avg. (P/E, P/BV, P/S) Stock Estimate EPS BV/share Sales/share

Mean

Call-Put Parity C P S X r T