Step By Step Instructions – Week 4 Assignment

1. Select a public company other than Pfizer.

2. Go to http://finance.yahoo.com

Click on Market Data on the left of the screen.

Type name of company in Search Box on top of the screen and click on Search Finance button.

3. Write down the information on the stock such as last closing price, beta of stock, EPS and Dividend in dollars and cents.

4. On the left side of screen, click on Key Statistics under Company. Note ROE as you scroll down.

5. You have the basic information to calculate the intrinsic value of the stock using the constant growth assumption in the Dividend Discount Model (refer to text readings).

6. a) Calculate the required rate of return (r) for the stock using the Capital Asset Pricing Model (CAPM).

r = (10-year Treasury Bond Yield) + [Beta (S&P 500 Index Return – 10-year Treasury Bond Yield)]

Search for 10-year Treasury Bond Yield using the Search box at finance.yahoo.com.

S&P 500 Index Return for 2014 can be obtained at google.com. Since the return for 2015 was negative, we can use the 2014 value of 11.39%.

Plug in the data and calculate the required rate of return using the value for beta.

b) The constant growth rate of dividends, g = retention ratio x ROE

= (1 – payout ratio) x ROE

= [1 – (dividend per share/EPS)] x ROE.

g will be a percentage. Convert to a decimal by dividing by 100.

c) Intrinsic value of stock = Po = [Do (1 + g)]/(r – g)

Do is the dividend just paid while D1 = Do (1 + g) is the dividend to be paid.

Knowing Do or D1, r and g, you can calculate the intrinsic value.

7. Compare the intrinsic value above to the stock’s current market price. Explain any differences using information gleaned by studying assigned text chapters.

Intrinsic value is a version of fair value of a stock. The market price is the current market price of the stock. The reasons for undervaluation or overvaluation relative to the intrinsic value of the stock can be varied. (Refer to text readings).

 
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