Peer Review -Reserved for Erudite787
anglia85
review_this_paper.docxFarah Mohammad Rasheed
Sabrina Naqvi
Gloria the Investor
1. Calculate the required rate of return using the Capital Asset Pricing Model (CAPM).
RCAPM = Rf + Beta of stock (Rm - Rf ) ,
where, Rf = Risk free rate of return, here treasury bond return is taken, Rf = 4.30%
Rm = return on market, here we taken as broad market return, Rm = 11.90%
(Rm - Rf ) = this can be said be Risk premium , = 0.119-0.043 = 0.076
Considering the above, stockwise RCAPM as below.
|
Rating of stock |
Rf |
|
Beta of stock |
|
Market Prenium |
RCAPM |
|
|
|
|
1 |
0.043 |
+ |
0.65 |
x |
0.076 |
0.0924 |
i.e. |
9.24 |
% |
|
2 |
0.043 |
+ |
2.3 |
x |
0.076 |
0.2178 |
i.e. |
21.78 |
% |
|
3 |
0.043 |
+ |
1.89 |
x |
0.076 |
0.18664 |
i.e. |
18.66 |
% |
|
4 |
0.043 |
+ |
1.2 |
x |
0.076 |
0.1342 |
i.e. |
13.42 |
% |
|
5 |
0.043 |
+ |
1.35 |
x |
0.076 |
0.1456 |
i.e. |
14.56 |
% |
|
6 |
0.043 |
+ |
0.67 |
x |
0.076 |
0.09392 |
i.e. |
9.392 |
% |
|
7 |
0.043 |
+ |
1.78 |
x |
0.076 |
0.17828 |
i.e. |
17.83 |
% |
|
8 |
0.043 |
+ |
0.95 |
x |
0.076 |
0.1152 |
i.e. |
11.52 |
% |
|
9 |
0.043 |
+ |
0.92 |
x |
0.076 |
0.11292 |
i.e. |
11.29 |
% |
|
10 |
0.043 |
+ |
1.5 |
x |
0.076 |
0.157 |
i.e. |
15.7 |
% |
|
11 |
0.043 |
+ |
0.85 |
x |
0.076 |
0.1076 |
i.e. |
10.76 |
% |
|
12 |
0.043 |
+ |
0.38 |
x |
0.076 |
0.07188 |
i.e. |
7.188 |
% |
|
13 |
0.043 |
+ |
0.71 |
x |
0.076 |
0.09696 |
i.e. |
9.696 |
% |
|
14 |
0.043 |
+ |
1 |
x |
0.076 |
0.119 |
i.e. |
11.9 |
% |
|
15 |
0.043 |
+ |
0.73 |
x |
0.076 |
0.09848 |
i.e. |
9.848 |
% |
2. Value of stock under constant dividend growth model,
P0 = D1 /(Ke-g) , D1 = D0 (1+g), D1 is the dividend receivable after 1 year
|
Rating of stock |
D0 ($) |
g |
D1($) |
Ke |
|
P0 = |
|
|
|
|
D0 x g |
|
|
(D1/ke-g) |
|
1 |
0.95 |
0.0065 |
0.956 |
0.0924 |
= |
11.13 |
|
2 |
0 |
-1 |
0.000 |
0.2178 |
= |
0.00 |
|
3 |
0 |
0 |
0.000 |
0.18664 |
= |
0.00 |
|
4 |
1.3 |
0.0623 |
1.381 |
0.1342 |
= |
19.21 |
|
5 |
0.75 |
0.0095 |
0.757 |
0.1456 |
= |
5.56 |
|
6 |
6 |
0.05 |
6.300 |
0.09392 |
= |
143.44 |
|
7 |
0 |
0 |
0.000 |
0.17828 |
= |
0.00 |
|
8 |
0.75 |
0.0075 |
0.756 |
0.1152 |
= |
7.02 |
|
9 |
0.38 |
0.0038 |
0.381 |
0.11292 |
= |
3.50 |
|
10 |
0 |
-0.9 |
0.000 |
0.157 |
= |
0.00 |
|
11 |
2 |
0.0225 |
2.045 |
0.1076 |
= |
24.03 |
|
12 |
0 |
-0.01 |
0.000 |
0.07188 |
= |
0.00 |
|
13 |
6 |
0.0525 |
6.315 |
0.09696 |
= |
142.04 |
|
14 |
1 |
0.08 |
1.080 |
0.119 |
= |
27.69 |
|
15 |
1.35 |
0.0885 |
1.469 |
0.09848 |
= |
147.24 |
3. Comparison of market price of stock & stock value computed.
|
Rating of stock (given) |
Market Price (given) |
Market Value* |
Stock value over market price ($) |
|
1 |
12.05 |
11.13 |
-0.92 |
|
2 |
28.02 |
0.00 |
-28.02 |
|
3 |
17.75 |
0.00 |
-17.75 |
|
4 |
92.43 |
19.21 |
-73.22 |
|
5 |
63.79 |
5.56 |
-58.23 |
|
6 |
71.11 |
143.44 |
72.33 |
|
7 |
10.00 |
0.00 |
-10.00 |
|
8 |
49.51 |
7.02 |
-42.49 |
|
9 |
101.00 |
3.50 |
-97.50 |
|
10 |
39.78 |
0.00 |
-39.78 |
|
11 |
29.75 |
24.03 |
-5.72 |
|
12 |
73.09 |
0.00 |
-73.09 |
|
13 |
20.39 |
142.04 |
121.65 |
|
14 |
18.25 |
27.69 |
9.44 |
|
15 |
7.00 |
147.24 |
140.24 |
4. What do your results mean for Gloria?
Following shall be sequence while investing in these stocks on the basis of stock value computed.
|
Rating of stock (given) |
Market Price (given) |
Market Value* |
Stock value over market price ($) |
Sequence for investment |
|
|
|
|
|
|
|
15 |
7.00 |
147.24 |
140.24 |
1 |
|
6 |
71.11 |
143.44 |
72.33 |
2 |
|
13 |
20.39 |
142.04 |
121.65 |
3 |
|
14 |
18.25 |
27.69 |
9.44 |
4 |
|
11 |
29.75 |
24.03 |
-5.72 |
5 |
|
4 |
92.43 |
19.21 |
-73.22 |
6 |
|
1 |
12.05 |
11.13 |
-0.92 |
7 |
|
8 |
49.51 |
7.02 |
-42.49 |
8 |
|
5 |
63.79 |
5.56 |
-58.23 |
9 |
|
9 |
101.00 |
3.50 |
-97.50 |
10 |
|
2 |
28.02 |
0.00 |
-28.02 |
11 |
|
3 |
17.75 |
0.00 |
-17.75 |
12 |
|
7 |
10.00 |
0.00 |
-10.00 |
13 |
|
10 |
39.78 |
0.00 |
-39.78 |
14 |
|
12 |
73.09 |
0.00 |
-73.09 |
15 |
Discussion Questions:
3. Compare the values you calculated in questions 1 & 2. Do the values closely approximate the stocks market price? If not, why not?
There is a significant difference between intrinsic value and market value. Intrinsic value is an estimate of the actual true value of a company. Market value is the value of a company as reflected by the company's stock price. Therefore, market value may be significantly higher or lower than the intrinsic value.
4. What do your results mean for Gloria?
Out of the 15 stocks, Gloria can only consider those stocks, which have high Beta value and high required rate of return. Also the growth factor is also to be considered in the case. Thus after calculation and observation of the 15 stocks we can easily select 5 stocks which Gloria can consider for more profitability in the business.
5. Are there other options Gloria might consider for valuing stocks?
The dividend discount model (DDM) is a method of valuing a company's stock price based on the theory that its stock is worth the sum of all of its future dividend payments, discounted back to their present value. The methods used to analyze securities and make investment decisions fall into two very broad categories: fundamental analysis and technical analysis. Fundamental analysis involves analyzing the characteristics of a company in order to estimate its value. Technical analysis takes a completely different approach; it doesn't care one bit about the "value" of a company or a commodity. Technicians are only interested in the price movements in the market.
6. How does your result affect the “market efficiency” theory?
Market efficiency survives the challenge from the literature on long-term return anomalies. Consistent with the market efficiency hypothesis that the anomalies are chance results, apparent overreaction to information is about as common as under reaction, and post-event continuation of pre-event abnormal returns is about as frequent as post-event reversal. Most important, consistent with the market efficiency prediction. Basically, the market efficiency theory states that information asymmetry eventually dissipates, as the information becomes known to investors and public and until the true value of the stock equates to current market price that apparent anomalies can be due to methodology, most long-term return anomalies tend to disappear with reasonable changes in technique.
