Now calculate the intrinsic value of three of the firms you selected in the previous question. Make

Question:

Now calculate the intrinsic value of three of the firms you selected in the previous question.

Make reasonable judgments about the market risk premium and the risk-free rate.

a. What is the required return on each firm based on the CAPM? You can find the beta of each firm from its Statistics page.

b. Try using a two-stage growth model, making reasonable assumptions about how future growth rates will differ from current growth rates. Compare the intrinsic values derived from the two-stage model to the intrinsic values you find assuming a constant-growth rate.

Which estimate seems more reasonable for each firm?

previous question.

Choose 10 firms that interest you and download their financial statements from any of these Web sites: finance.yahoo.com, finance.google.com, or money.msn.com.

a. For each firm, find the return on equity (ROE), the number of shares outstanding, the dividends per share, and the net income. Record them in a spreadsheet.

b. Calculate the total amount of dividends paid (Dividends per share × Number of shares outstanding), the dividend payout ratio (Total dividends paid/Net income), and the plowback ratio (1 − Dividend payout ratio).

c. Compute the sustainable growth rate, g = b × ROE, where b equals the plowback ratio.

d. Plot the P/E ratios of the firms against the growth rates in a scatter diagram. Is there a relationship between the two?

e. Plot the price-to-book ratios against the price-earnings ratio for your sample of firms. Are the two variables correlated? What about price-to-sales versus price-earnings?

f. For each firm, compare the 3-year growth rate of earnings per share with the growth rate you calculated above. Is the actual rate of earnings growth correlated with the sustainable growth rate you calculated?

Step by Step Answer:

Related Book For  book-img-for-question

ISE Investments

ISBN: 9781260571158

12th International Edition

Authors: Zvi Bodie, Alex Kane, Alan Marcus

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