please complete the assignment and get at teasr a 90% homework must be done within 24-48 hours of acceptance…
FIN
4
3
1
0*0
2
*Money and Capital Markets, Spring 2013
Prof. Ananth Narayan HW Assignment 3 (Chapters 10-12)
Assignment
Stock Market Valuation/Risk
Chapter(s)
10,11,12
Group
Name
Student Name(s)
Date
Instructions:
HW Assignments will be uploaded to Kean Blackboard and must be accessed from there. You must work in groups where assigned (or independently if not assigned to groups) on homework assignments. Points are noted against each question. You are required to submit Home Work assignments electronically on Kean Blackboard using MS-Office or other text editor. You are required to complete your assignments as per the due date indicated by the Professor.
Total Points in Assignment: 200
(Points scored will be scaled down to a maximum of 20 towards the final grade)
For this assignment, you will work in groups. The Professor’s initial allocation to groups is as follows – you are free to change groups if the group you are leaving from and the group you intend to join you accept. All group changes must be notified to the Professor. Group size cannot exceed four.
| Group | Name | |||
|
Jupiter |
Becerra, Aime |
|||
|
Carranza, Leonel |
||||
|
Smith, Elizabeth R. |
||||
|
Mars |
Josias-Sejour, Nickendson |
|||
|
Lopez, Joseph |
||||
|
Stathis, Robert J. |
||||
|
Mercury |
Barahona, Luis |
|||
|
Doening, Colleen M. |
||||
|
Mattos, Alberto |
||||
|
Tumblin, Lisa D. |
||||
|
Neptune |
Arnold, Joseph |
|||
|
Hernandez, Danielle M. |
||||
|
Plaza, Ricardo S. |
||||
|
Saturn |
Etienne, Sandy |
|||
|
German, Judith A. |
||||
|
Johnson, Montique A. |
||||
|
Uranus |
Akunga, Paul O. |
|||
|
Michel, Christopher |
||||
|
Pelosi, Vincent M. |
||||
|
Venus |
Mbida, Charles E. |
|||
|
Rapisaldo, Philip |
||||
|
Rebelo, Justin R. |
||||
|
Santos, Cristina |
The purpose of this assignment is to provide all students with real-world experience in analyzing stocks using publicly available data and put academic theories to the test. This assignment will allow students to determine if prices of stocks are undervalued or overvalued based on the different pricing models reviewed in Chapter 12. For this exercise, each student in the class will need to select at least one of the 4 companies (these are large well-known companies and are part of the Dow Jones Industrial Average):
· Alcoa
· General Electric
· Johnson & Johnson
· Coca Cola
You are free to choose more than one company to analyze or all companies if you wish, but make sure you analyze at a minimum one of the above companies. You are free to use the worksheet template that has some pre-calculated cells for you to work with:
Company Analysis Worksheet Template
1. Stock Data (
1
5
points)
a. For the selected stock(s) from the Dow Jones Industrial Average as of the date you do the analysis: From ‘Yahoo Finance’ web pages for each stock, show the following in a table:
· Name
·
Ticker
Symbol
· Closing Price as of close of trading on the day of the analysis
· Earnings Per Share (trailing 12 months, also known as ‘ttm’) – available in the Summary section
· Dividends Per Share – available in the Summary section
· Beta
– available in the Summary section
· Industry – available in the Profile section
· Industry Price / Earnings Ratio
– available under the Summary section of the industry page
2. Stock Price based on Price Earnings Valuation (
25
points)
a. For each stock, enhance the table to show the following:
· Average annual growth rate for earnings in the next 5 years – available in the Analyst Estimates section
· Earnings Per Share (projected for the next 12 months) based on the annual growth rate obtained above and the current Earnings Per Share for the trailing 12 months you have already compiled
· Calculate the Valuation per share based on the Price-Earnings Method for each stock
b. Based on the valuation per share you calculated above, indicate whether each stock is under-valued or over-valued purely based on the Price Earnings Valuation method
3. Required Return using Capital Asset Pricing Model (CAPM) (25 points)
For this section, assume that the risk free rate is 2% and Market Risk Premium is 5%. If you would like to use other values of Risk free rate and Market Risk Premium based on independent research, feel free to do so, but indicate your sources and conclusions drawn from independent research (Note: I may give out bonus points for additional research material that you submit).
a. For each stock, enhance the table to show the following utilizing the beta, risk free rate, and Market risk premium you have compiled already:
· Required rate of return based on CAPM
4. Stock Valuation using the Dividend Discount Model (25 points)
a. For each stock, enhance the table to show the following:
· Trailing Annual Dividend Yield – available in the Key Statistics section, or alternatively you can calculate this based on the current dividend per share and the share price you have already compiled from section 1
· The 5 year Average Dividend Yield– available in the Key Statistics section
· Based on the above two items, compute the average annual growth rate in dividends by using the formula :
(1 + r)^5 = (1 + (5 yr Av Div Yield – Trailing Ann Div Yield) / (Trailing Ann Div Yield) )
You will be computing ‘r’ which is the annual growth rate in dividends that will satisfy the above growth equation
· If you would like to use other estimates of dividend growth for this stock, feel free to do so, but indicate your sources and rationale (Note: I may give you bonus points for independent research that is defensible)
· Calculate the Valuation per share based on the Dividend Discount Model using the required rate of return as well as the dividend growth rate you have compiled already.
b. Based on the valuation per share you calculated above, indicate whether each stock is under-valued or over-valued purely based on the Dividend Discount Valuation method
5. Stock Valuation using the Adjusted Dividend Discount Model (25 points)
a. For each stock, enhance the table to show the following:
· Expected Dividends Per Share for the next 12 months based on the current 12 month trailing dividends and the annual growth rate in dividends you calculated in section 4
· Expected Earnings Per Share for the next 12 months based on the current 12 month trailing earnings and the annual growth rate in earnings you compiled in section 2
· Calculate the Valuation per share based on the Adjusted Dividend Discount Model assuming you are holding each stock for 12 months (use the required rate of return as well as the Industry Price Earnings multiple you have compiled already)
b. Based on the valuation per share you calculated above, indicate whether each stock is under-valued or over-valued purely based on the Adjusted Dividend Discount Valuation method
6
. Stock Valuation Sensitivities (25 points)
The key factors driving stock valuation using the above methods are:
· Industry Price / Earnings Ratio
· Market Risk Premium
· Beta
In your analysis, change the above parameters and summarize how the different model valuations are impacted. For example, if the Industry PE ratio is high relative to the market, try reducing the Industry PE ratio and see how this affects valuation prices from the PE method and the ADDM method.
If you increase or decrease the Market Risk Premium and/or Beta, determine how this impacts the valuation prices from the DDM and the ADDM methods.
Note – there are other parameters that may influence the valuation such as earnings growth and dividend growth rates. For bonus points, try changing these to see how your valuations get impacted.
7
. Summarize your findings and overall recommendation (
30
points)
For your assigned stock, summarize the key findings and present your overall recommendation on whether you would buy or sell the stock. Your summary findings must be in the following format:
|
Stock Name |
| Ticker |
|
Closing Per Share Price as of April 1, 2013 |
|
Valuation per Share based on PE method |
|
Is stock over / under valued based on PE method? |
|
Valuation per Share based on DDM method |
|
Is stock over/under valued based on DDM method? |
|
Valuation per Share based on ADDM method |
|
Is stock over/under valued based on ADDM method? |
|
Overall recommendation (Would you buy or sell the stock) |
|
What are the limitations of the different valuation methods, as applied to your specific stock? Which method(s) are more relevant to your specific stock? |
|
Other Assumptions and Notes regarding your recommendation |
|
What actually happened to the stock price at the time of your submission of this HW? Has the stock gone up or down in price from April 1st? |
|
Research news and events driving the stock price and provide commentary on whether or not the stock price behaved as per your recommendation |
Note: For the next question, you will need to answer for all of the stocks irrespective of whether you chose one or more of the stocks to analyze in sections 1 thru 7.
8
. Stock Risk – Sharpe Ratio and Traynor Ratio
Assume that the standard deviation for each of the stocks for the past 1year is shown below:
Alcoa: 37%
General Electric: 25%
Johnson & Johnson: 13%
Coca Cola : 15%
Compile a table showing the Sharpe Ratio and the Traynor Ratio for one year worth of returns for each of the companies and indicate which of the stocks you would recommend purely based on these ratios (Note: For identifying the one year returns, go to Yahoo! Finance page for each of the stocks and retrieve the 52-week return under the ‘Key Statistics’ page).
Scoring Sheet:
|
Question |
Max Points |
Points Scored |
|||
| 1 | 15 | ||||
| 2 | 25 | ||||
| 3 | |||||
| 4 | |||||
| 5 | |||||
| 6 | |||||
| 7 | 30 | ||||
| 8 | |||||
|
TOTAL |
150 |
Disclaimer:
Please note that this is an academic exercise and should not be construed as a trading recommendation. You should not be relying solely on this information for basing real trading decisions. The markets are driven by a large number of factors which are over and beyond the scope of this exercise.
