From the scenario, value a share of TFCS stock using a growth model method and compare that
Question:
"From the scenario, value a share of TFC’S stock using a growth model method and compare that value to the current trading price of a share of TFC. Determine whether the stock is undervalued or overvalued. Provide a rationale for your response."
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(1) Linda would like you to calculate the required rate of return for TFC’s stock given that the long term bond rate is three percent, the market rate is eighteen percent and TFC’s calculated beta is point 8.
(2) What would happen if the beta would change to .6 (point 6) and all other values are the same?
(3) What would happen if the U.S. long term bond rate was 2% and all other values are the same?
(1) Correct Answer = 15%.
• If get wrong: Nice try To calculate the CAPM you need to use the formula RTFC = rRF + beta TFC x RPM
When the risk free rate is .03, market rate is .18 and beta is .8
(2) Correct Answer = 12%
• If get wrong: Nice try To calculate the CAPM you need to use the formula RTFC = rRF + beta TFC x RPM
When the risk free rate is .03, market rate is .18 and beta is .6
(3) Correct Answer = 14.80%
• If get wrong: Nice try, but remember to calculate the CAPM you need to use the formula RTFC = rRF + beta TFC x RPM
When the risk free rate is .02, market rate is .18 and beta is .8
Statistics for Business and Economics
ISBN: 978-0132930192
8th edition
Authors: Paul Newbold, William Carlson, Betty Thorne