Hi....I need help with question #4 (below) which is in part interpreting or expl
ID: 2821765 • Letter: H
Question
Hi....I need help with question #4 (below) which is in part interpreting or explaining the data gathered from #1 and #2. Thank you.
For each stock listed, calculate the required rate of return as indicated by the Capital Asset Pricing Model (CAPM).
Formula
Kequity = Krf + (Km – Krf)
STOCK 1
0.041 + [ 0.74 x (0.121 – 0.041)]
= 0.1002
Required Return 10.02%
STOCK 2
0.041 + [ 2.30 x (0.121 – 0.041)]
= 0.225
Required Return 22.50%
STOCK 3
0.041 + [ 1.89 x (0.121 – 0.041)]
= 0.1922
Required Return
19.22%
STOCK 4
0.041 + [ 1.31 x (0.121 – 0.041)]
= 0.1458
Required Return
14.58%
STOCK 5
0.041 + [ 1.52 x (0.121 – 0.041)]
= 0.1626
Required Return
16.26%
STOCK 6
0.041 + [ 1.04 x (0.121 – 0.041)]
= 0.1242
Required Return
12.42%
STOCK 7
0.041 + [ 1.99 x (0.121 – 0.041)]
= 0.2002
Required Return
20.02%
STOCK 8
0.041 + [ 0.89 x (0.121 – 0.041)]
= 0.1122
Required Return
11.22%
STOCK 9
0.041 + [ 1.06 x (0.121 – 0.041)]
= 0.1258
Required Return
12.58%
STOCK 10
0.041 + [ 1.76 x (0.121 – 0.041)]
= 0.1818
Required Return
18.18%
STOCK 11
0.041 + [ 0.91 x (0.121 – 0.041)]
= 0.1138
Required Return
11.38%
STOCK 12
0.041 + [ 1.80 x (0.121 – 0.041)]
= 0.185
Required Return
18.50%
STOCK 13
0.041 + [ 0.82 x (0.121 – 0.041)]
= 0.1066
Required Return
10.66%
STOCK 14
0.041 + [ 1.12 x (0.121 – 0.041)]
= 0.1306
Required Return
13.06%
STOCK 15
0.041 + [ 0.99 x (0.121 – 0.041)]
= 0.1202
Required Return
12.02%
STOCK 16
0.041 + [ 1.01 x (0.121 – 0.041)]
= 0.1218
Required Return
12.18%
STOCK 17
0.041 + [ 0.67 x (0.121 – 0.041)]
= 0.0946
Required Return
9.46%
STOCK 18
0.041 + [ 1.11 x (0.121 – 0.041)]
= 0.1298
Required Return
12.98%
STOCK 19
0.041 + [ 0.78 x (0.121 – 0.041)]
= 0.1034
Required Return
10.34%
STOCK 20
0.041 + [ 1.20 x (0.121 – 0.041)]
= 0.137
Required Return
13.70%
2. Calculate the value of each stock share using the constant growth formula.
Formula
Vcs = D1 / (Kequity - g)
Stock Rank
Tot Div, 2003
5-Yr Div Growth
g
Beta
Price, 1/05/04
Value of Stock
1
$0.95
0.58%
0.0058
0.74
$14.89
$10.06
2
$0.00
-100.00%
-1.0000
2.3
$29.02
$0.00
3
$0.00
0.00%
0.0000
1.89
$18.83
$0.00
4
$1.25
8.50%
0.0850
1.31
$93.48
$20.56
5
$0.78
1.25%
0.0125
1.52
$67.29
$5.20
6
$0.06
-9.00%
-0.0900
1.04
$3.28
$0.28
7
$0.00
-100.00%
-1.0000
1.99
$9.00
$0.00
8
$0.00
0.00%
0.0000
0.89
$55.91
$0.00
9
$6.22
0.98%
0.0098
1.06
$98.47
$53.62
10
1.00
-0.48%
0.0048
1.76
$43.07
$5.36
11
0.00
-100.00%
-1.0000
0.91
$37.55
$0.00
12
$0.25
2.10%
0.0210
1.8
$38.30
$1.52
13
$0.98
-2.00%
-0.0200
0.82
$76.33
$7.74
14
$2.25
4.00%
0.0400
1.12
$67.09
$24.83
15
$5.80
-8.00%
-0.0800
0.99
$193.05
$28.97
16
$1.02
13.00%
0.1300
1.01
$38.33
$124.39
17
$6.00
5.00%
0.0500
0.67
$71.11
$134.53
18
0.00
0.00%
0.0000
1.11
$9.23
$0.00
19
$1.00
9.00%
0.0900
0.78
$19.35
$74.63
20
$0.00
-100.00%
-1.0000
1.2
$29.92
$0.00
#4 Compare the values you calculated to each of the market prices for the top twenty stock picks. Are your calculations close approximations of the market prices? Why do you think there are differences?
STOCK 1
0.041 + [ 0.74 x (0.121 – 0.041)]
= 0.1002
Required Return 10.02%
STOCK 2
0.041 + [ 2.30 x (0.121 – 0.041)]
= 0.225
Required Return 22.50%
STOCK 3
0.041 + [ 1.89 x (0.121 – 0.041)]
= 0.1922
Required Return
19.22%
STOCK 4
0.041 + [ 1.31 x (0.121 – 0.041)]
= 0.1458
Required Return
14.58%
STOCK 5
0.041 + [ 1.52 x (0.121 – 0.041)]
= 0.1626
Required Return
16.26%
STOCK 6
0.041 + [ 1.04 x (0.121 – 0.041)]
= 0.1242
Required Return
12.42%
STOCK 7
0.041 + [ 1.99 x (0.121 – 0.041)]
= 0.2002
Required Return
20.02%
STOCK 8
0.041 + [ 0.89 x (0.121 – 0.041)]
= 0.1122
Required Return
11.22%
STOCK 9
0.041 + [ 1.06 x (0.121 – 0.041)]
= 0.1258
Required Return
12.58%
STOCK 10
0.041 + [ 1.76 x (0.121 – 0.041)]
= 0.1818
Required Return
18.18%
STOCK 11
0.041 + [ 0.91 x (0.121 – 0.041)]
= 0.1138
Required Return
11.38%
STOCK 12
0.041 + [ 1.80 x (0.121 – 0.041)]
= 0.185
Required Return
18.50%
STOCK 13
0.041 + [ 0.82 x (0.121 – 0.041)]
= 0.1066
Required Return
10.66%
STOCK 14
0.041 + [ 1.12 x (0.121 – 0.041)]
= 0.1306
Required Return
13.06%
STOCK 15
0.041 + [ 0.99 x (0.121 – 0.041)]
= 0.1202
Required Return
12.02%
STOCK 16
0.041 + [ 1.01 x (0.121 – 0.041)]
= 0.1218
Required Return
12.18%
STOCK 17
0.041 + [ 0.67 x (0.121 – 0.041)]
= 0.0946
Required Return
9.46%
STOCK 18
0.041 + [ 1.11 x (0.121 – 0.041)]
= 0.1298
Required Return
12.98%
STOCK 19
0.041 + [ 0.78 x (0.121 – 0.041)]
= 0.1034
Required Return
10.34%
STOCK 20
0.041 + [ 1.20 x (0.121 – 0.041)]
= 0.137
Required Return
13.70%
Explanation / Answer
4)
The reason for differences are as follows:
a) Many companies listed above have zero values but positive market values. Dividend growth model cannot be used to value companies who don't pay dividends. Many technology companies like google and facebook don't pay dividends because they need cash for the new projects. Thus these companies cannot be valued using the dividend discount model.
b) Also, for most of the companies, the value of the company is less than the market price. The dividends after the 5 year have been ignored due to which company will be undervalued.
c) Some companies values are higher than the market price, which may be due to bad financial performance by the company in short-term. The market price can also be down due to negative news impacting the company or the sector.
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