Company Data

FIN 488 Make-up Exam due on Friday at  4pm.

 

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Is the Price Right?

  1. For company data, visit YAHOO! Finance (or any other financial database such as Mergent Online).

 

  1. Choose a company that pays dividends and retrieve the monthly stock prices from 1/15/2010 to 1/15/2020.

 

  1. Compute the Required Rate of Return (rs) using the CAPM

 

Step 1: Find the risk-free rate

  • From any database, research articles, text books, or internet e.g.

https://ycharts.com/indicators/10_year_treasury_rate

 

Step 2: Compute beta

  • Using regression analysis
  • Use SP500 or Dow Jones as the market portfolio

 

Step 3: Research past articles to get the market return or market risk premium  (rm – rf )

  • Use the text, research articles, or internet e.g.

http://aswathdamodaran.blogspot.com/2013/05/equity-risk-premiums-erp-and-stocks.html

 

d).  Using the required return from CAPM above, compute the intrinsic stock price using the Gordon Growth Model:

P0  = D1 / (rs –g)

= D0 (1 +g)/(rs –g)

 

Steps to compute growth

Get dividends from yahoo Finance

Add up dividends for each year

Calculate the annual percentage change in dividends using the formula:

 

= (Ending Dividend – Beginning Dividend) / Beginning Dividend

 

Example:

= (2011 Dividend – 2010 Dividend) / 2010 Dividend

 

The average of the percentage changes in dividends is the growth rate

 

Steps to compute D1

The total dividends for 2019 is D0

D1  = D0 (1 + g)

 

Steps to compute the intrinsic value

Put the variables in the formula to find P0

P0  = D1 / (rs –g)

 

e).  Determine whether the stock is over-valued or under-valued?

Compare the computed stock price (intrinsic value) to the current market price on

Yahoo! Finance

If the intrinsic value > listed stock price, the stock is undervalued

If the intrinsic value < listed stock price, the stock is overvalued

 

f).  Make your recommendations to investors whether to buy, sell or hold the stock.

 

Deliverables:

  1. Excel file with all the data and calculation
  2. WORD document with your recommendations and an explanation of both models

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