Please follow instructions on the attachment. There is also an example you can go off of. Please include references that are used.
2/24/2021 Thread: Chapter 7: Common Stock Valuatiom – 2021SP-12693... https://elearning.uhv.edu/webapps/discussionboard/do/message?action=list_messages&course_id=_143961_1&nav=discussion_board_entry&conf_id… 1/2 Thread: Chapter 7: Common Stock Valuatiom 2021SP-12693-FINC3304-Business Finance Discussion Board Forum: Week 6 DB Thread: Chapter 7: Common Stock Valuatiom 2 Post(s) in this Thread 1 Unread 0 Unread Replies to Me Select: All None Message Actions Expand All Collapse All Chapter 7: Common Stock Valuatiom 3 days agoMassoud Metghalchi Discussion Board remains active from 2/22 to 2/28 1. Choose a mature or value stock (In contrast to growth stocks, mature stocks should have low growth in EPS, low beta, low market/book ratio, low P/E) that has not been chosen by other students. Estimate the range of its values. (Hint: See the attached �le named “Valuation of mature stock ABC” use the same method for your chosen stock. However, I estimated ABC’s stock sometimes ago, you need to use current data, also, at that time I was using another edition of your textbook, so page references are probably wrong). You could also go to my lecture notes and look at the “Constant Growth Model” on page 3. 1. Choose a mature stock. Don’t choose Net�ix or similar stocks, these are growth stock and the formula of mature stocks do not work for growth stocks, for growth stocks one needs to use multi-stage growth model. Value stocks usually have beta less than 1 and P/E less than 16. 2. Find its dividend growth rate. You need to see how much dividend was 10 years ago, and what is its dividend now. Then Use Excel’s Rate to estimate the rate of growth. For example if 10 years ago dividend was $1 and now it is $2, then we can estimate growth in dividend = g = RATE(10,0,-1,2) = 7.18 % Chapter Seven: Common Stock Valuation Fin 3304 Here are the steps to follow: ? My UHV Courses UHV Content Collection UHV Blackboard Help UHV Course Evals UHV Services Monica Bonner 61 https://elearning.uhv.edu/webapps/blackboard/execute/courseMain?course_id=_143961_1 https://elearning.uhv.edu/webapps/discussionboard/do/conference?toggle_mode=read&action=list_forums&course_id=_143961_1&nav=discussion_board_entry https://elearning.uhv.edu/webapps/discussionboard/do/forum?action=list_threads&forum_id=_671414_1&conf_id=_371563_1&course_id=_143961_1&nav=discussion_board_entry https://elearning.uhv.edu/webapps/discussionboard/do/message?action=collect&requestType=unread_user_thread&status=unread&course_id=_143961_1&conf_id=_371563_1&forum_id=_671414_1&nav=discussion_board_entry&nav=discussion_board_entry&message_id=_10953924_1&request_source=detail_page javascript:expandAllMessagesInTheTree(); javascript:collapseAllMessagesInTheTree(); https://elearning.uhv.edu/webapps/portal/execute/tabs/tabAction?tab_tab_group_id=_21_1 https://elearning.uhv.edu/webapps/portal/execute/tabs/tabAction?tab_tab_group_id=_23_1 https://elearning.uhv.edu/webapps/portal/execute/tabs/tabAction?tab_tab_group_id=_41_1 https://elearning.uhv.edu/webapps/portal/execute/tabs/tabAction?tab_tab_group_id=_24_1 https://elearning.uhv.edu/webapps/portal/execute/tabs/tabAction?tab_tab_group_id=_25_1 https://elearning.uhv.edu/webapps/login/?action=logout 2/24/2021 Thread: Chapter 7: Common Stock Valuatiom – 2021SP-12693... https://elearning.uhv.edu/webapps/discussionboard/do/message?action=list_messages&course_id=_143961_1&nav=discussion_board_entry&conf_id… 2/2 Select: Reply 3. Estimate K; we can estimate K in two di�erent methods: 1. D1/P0 + g, here you have estimated g above. Since you have current dividend, then you can estimate D1= D0*(1=G) and P0 is the current stock piece. 2. The second method of estimating k = CAPM= Kf + b* (Historical Market Risk Premium). Kf is the current rate of 10-year Treasury note widely available and b is the beta of your chosen stock, again widely available. And use 6.5% for Historical market risk premium. Your �nal K must be the average of the two methods. 4. Now you have all variables and write the stock value, P = D1/(K – g) 5. Do a sensitivity analysis, change g by + - 0.5 % and see what happens to value. Then change K by + - 0.5% and see what happens to value. This way you get a range of values for your chosen stock. You have estimated all the above variables and plug in and �nd the stock’s value or price. Good luck. RE: Chapter 7: Common Stock Valuatiom 23 hours agoJennifer Say All None Message Actions Expand All Collapse All ← OK javascript:Message.editOrReplyMessage( '_10953924_1', replyUrl+'_10953924_1', $('_10953924_1') ) javascript:toggleReadByIcon('_10963792_1') javascript:toggleFlagByIcon('_10963792_1') javascript:expandAllMessagesInTheTree(); javascript:collapseAllMessagesInTheTree(); https://elearning.uhv.edu/webapps/discussionboard/do/forum?action=list_threads&course_id=_143961_1&conf_id=_371563_1&forum_id=_671414_1&message_id=_10953924_1&nav=discussion_board_entry&nav=discussion_board_entry Valuation of Mature Stocks, ABC By Dr. M. Metghalchi Valuation made on 1/15/04 This valuation of ABC stock was made in January 15th of 2004. You need to do the same; however, your data should reflect current market data and not my data of 2004. Constant Growth Model: was developed and popularized by Myron J. Gordon. It expanded the generalized stock valuation model to include the element of growth at a constant rate. The mature stock valuation formula is: D1 P0 = -------- ks - g An important assumption of this calculation is that ks, required rate of return of the stock, must be greater than g, the growth rate in earnings and dividends. (This is true only for mature stocks, so when you are choosing a stock, make sure you choose a mature stock, if you choose a growth stock, g (Growth in earnings and dividends) will be higher than ks , the valuation will not work and you get a negative price when you apply the above formula. For the above formula we need to estimate g, ks and D1 for your chosen stock. Estimation of g: Method 1: Average of analysts Go Yahoo/Finance or any other reputable sites and get growth rate for the next 5 years for ABC stock. From Yahoo/finance I get the next 5 years’ growth to be 7.1 % (In January 2004). So, one method (Average of all analysts) gives me g = .071 Method 2: Historical estimation Another estimate of g according to historical methods is as follow: Quarterly dividend in 1994 = $.32 or 32 Cents Quarterly dividend in 2004 = $.54 or 54 Cents Over the past 10 years, dividends have grown from 32 cents to 54 cents, what is the growth rate? Excel solution: RATE(10,0,-.32,.54,0) = 5.37 % So, another estimate for g, according to historical method is 5.37% I use a g which is the average of the first and second methods: Growth rate of earnings = g = (7.1 + 5.37)/2 = 6.2 % Third method, less reliable, Optional: Another method is: g = ROE(Historical) * Retention rate ROE (Historical) = average of ROE over the past 10 years, can be found from Morningstar.com. Retention rate = 1 – Dividend Payout ratio. Estimation of Ks: Required Rate of Return for Royal Dutch = KRD We can use three methods to estimate KRD Method 1: Capital Asset Pricing Model Method 1: CAPM: According to CAPM, required rate of return for any security is given by: Ki = Krf + bi* (KM - kRF ) Ki = Required rate of return for stock i (KM - kRF ) = Market risk premium Krf = Current risk free rate or 10 year Treasury note rat. (Please see my audio/video file on how to apply CAPM) Writing the above equation for ABC Stock, we get: KABC = kRF + bABC* (KM - kRF ) From: Yahoo/Finance, or many other websites, I get current risk-free rate to be 4.03 %, or Krf = 4.03 %. This is at the time of writing (1/16/04) 10-year Treasury bond yield. Next, we need to estimate historical market risk premium: (KM - kRF) MRPM = (KM - kRF ) = Market Risk Premium = Large common stock return – long term government bond yield. For approximation, we usually use historical market risk premium for market risk premium. Note that historical means average of past years. Historical MRP = HMRP = Historical Large common stock return – Historical government bond yield. What is HMRP? We have actual realized return over the past 90 years as follow: Table 1: Data from 1926-2017 Table 1: Data from 1926-2017 As you can see from Table 1, investors historically have received greater returns for greater risk taking. (this part has been updated in 2020). Portfolio Average nominal annual rate of return % Annual standard deviation % or Risk Treasury Bills 3.4 % 3.1 % Treasury Bonds 6.0 % 9.9 % Corporate Bonds 6.4 % 8.3 % Large firm stocks 12.1 % 19.8 % Small firm stocks 16.5 % 31.7 % Question: what is the historical market risk premium? Historical Market risk premium (HMRP): A good approximation of MRP is: HMRP= Historical market return (S&P500) – Historical Treasury bond return HMRP 12.1 % - 6.0 % = 6.10 % Note: It is up to the researcher to choose an appropriate market risk premium within the 5% to 7.5 %. Any number between 5 and 7.5 % is acceptable for HMRP. If you are pessimistic, use a number close top 5 %, if you are optimistic about the market then use a number close to 7.5 %. Back to estimation of KABC Required rate of return for ABC stock. From yahoo.com or another website like Morningstar.com I find the beta of ABC stock to be 0.697 = 0.70 βRD = BETA of ABC = .697 0r .70 (two decimals is OK) kABC = kRF + beta of ABC *(HMRP) kABC = kRF + βABC * HMRP kRD = 4.03 + (6 %) *.70 = 4.03 + 4.20 = 8.23 % Note: I subjectively chose 6% for HMRP. Since I am within 5% to 7.5 %, then it is ok. You can use any number between 5 and 7.5 percent, if you use 10-year Treasury note for your current risk free rate. (Estimation was done in 2004). 2. METHOD II of estimating K: DCF Second way of estimating required rate of return for RD, kABC is as follow: KABC= D1/P0 + g In January 2004, the market price of ABC was $47, and its sum of the past four quarters dividend was: D0 = $1.95 (From Yahoo or Financial Statement) And g was estimated above to be 6.2 % D1= D0* (1+g) = 1.95*(1+ .062) = $2.07 KABC = D1/P0 + g = 2.07/47 + .062