Section 4: Valuation of Company’s Securities and Risk Assessment
(a) Bonds: Consider the longest-maturity bond of the company. Assuming a current discount rate
of
6%, what is the value of this bond?
(b) Common Stock: Consider the common stock of the company. Using the growth rate implied
by
the dividends paid five years ago and the most recent dividend as a constant growth rate, an
expected return of 12.5% and the Constant Growth Model, calculate the value of the company’s
common stock.
(c) Using your valuation date as a reference, and the stock price information obtained,
(i) if you purchased 100 shares of your company’s common stock 5 years ago, what would
(ii) What is the 5-year average return on the stock?
(iii) using the standard deviation of returns as the measure of risk, what is the volatility/risk of
(iv) using the Coefficient of Variation as a measure of the amount of risk (volatility) per unit
(v) Using historical stock returns data for the firm and an applicable market portfolio, run a
be your dollar and percentage returns on the stock?
the stock?
of return, how would you describe the relative merit of investing in this stock (hint:
compare with key competitor and application market index).
regression of firm return (dependent variable) and market portfolio return (independent
variable) and determine the beta for the stock.
(d) Key investment risks: what industry, market, and company-specific factors may result in your
company’s stock being a bad investment?
Section 4: Valuation of Company’s Securities and Risk Assessment
(a) Bonds: Consider the longest-maturity bond of the company. Assuming a current discount rate
of
6%, what is the value of this bond?
(b) Common Stock: Consider the common stock of the company. Using the growth rate implied
by
the dividends paid five years ago and the most recent dividend as a constant growth rate, an
expected return of 12.5% and the Constant Growth Model, calculate the value of the company’s
common stock.
(c) Using your valuation date as a reference, and the stock price information obtained,
(i) if you purchased 100 shares of your company’s common stock 5 years ago, what would
(ii) What is the 5-year average return on the stock?
(iii) using the standard deviation of returns as the measure of risk, what is the volatility/risk of
(iv) using the Coefficient of Variation as a measure of the amount of risk (volatility) per unit
(v) Using historical stock returns data for the firm and an applicable market portfolio, run a
be your dollar and percentage returns on the stock?
the stock?
of return, how would you describe the relative merit of investing in this stock (hint:
compare with key competitor and application market index).
regression of firm return (dependent variable) and market portfolio return (independent
variable) and determine the beta for the stock.
(d) Key investment risks: what industry, market, and company-specific factors may result in your
company’s stock being a bad investment?
(a) Bo.
Section 4 Valuation of Company’s Securities and Risk Assessment.pdf
1. Section 4: Valuation of Company’s Securities and Risk Assessment
(a) Bonds: Consider the longest-maturity bond of the company. Assuming a current discount rate
of
6%, what is the value of this bond?
(b) Common Stock: Consider the common stock of the company. Using the growth rate implied
by
the dividends paid five years ago and the most recent dividend as a constant growth rate, an
expected return of 12.5% and the Constant Growth Model, calculate the value of the company’s
common stock.
(c) Using your valuation date as a reference, and the stock price information obtained,
(i) if you purchased 100 shares of your company’s common stock 5 years ago, what would
(ii) What is the 5-year average return on the stock?
(iii) using the standard deviation of returns as the measure of risk, what is the volatility/risk of
2. (iv) using the Coefficient of Variation as a measure of the amount of risk (volatility) per unit
(v) Using historical stock returns data for the firm and an applicable market portfolio, run a
be your dollar and percentage returns on the stock?
the stock?
of return, how would you describe the relative merit of investing in this stock (hint:
compare with key competitor and application market index).
regression of firm return (dependent variable) and market portfolio return (independent
variable) and determine the beta for the stock.
(d) Key investment risks: what industry, market, and company-specific factors may result in your
company’s stock being a bad investment?
Section 4: Valuation of Company’s Securities and Risk Assessment
(a) Bonds: Consider the longest-maturity bond of the company. Assuming a current discount rate
of
3. 6%, what is the value of this bond?
(b) Common Stock: Consider the common stock of the company. Using the growth rate implied
by
the dividends paid five years ago and the most recent dividend as a constant growth rate, an
expected return of 12.5% and the Constant Growth Model, calculate the value of the company’s
common stock.
(c) Using your valuation date as a reference, and the stock price information obtained,
(i) if you purchased 100 shares of your company’s common stock 5 years ago, what would
(ii) What is the 5-year average return on the stock?
(iii) using the standard deviation of returns as the measure of risk, what is the volatility/risk of
(iv) using the Coefficient of Variation as a measure of the amount of risk (volatility) per unit
(v) Using historical stock returns data for the firm and an applicable market portfolio, run a
be your dollar and percentage returns on the stock?
4. the stock?
of return, how would you describe the relative merit of investing in this stock (hint:
compare with key competitor and application market index).
regression of firm return (dependent variable) and market portfolio return (independent
variable) and determine the beta for the stock.
(d) Key investment risks: what industry, market, and company-specific factors may result in your
company’s stock being a bad investment?
(a) Bonds: Consider the longest-maturity bond of the company. Assuming a current discount rate
of
6%, what is the value of this bond?
(b) Common Stock: Consider the common stock of the company. Using the growth rate implied
by
the dividends paid five years ago and the most recent dividend as a constant growth rate, an
5. expected return of 12.5% and the Constant Growth Model, calculate the value of the company’s
common stock.
(c) Using your valuation date as a reference, and the stock price information obtained,
(i) if you purchased 100 shares of your company’s common stock 5 years ago, what would
(ii) What is the 5-year average return on the stock?
(iii) using the standard deviation of returns as the measure of risk, what is the volatility/risk of
(iv) using the Coefficient of Variation as a measure of the amount of risk (volatility) per unit
(v) Using historical stock returns data for the firm and an applicable market portfolio, run a
be your dollar and percentage returns on the stock?
the stock?
of return, how would you describe the relative merit of investing in this stock (hint:
compare with key competitor and application market index).
6. regression of firm return (dependent variable) and market portfolio return (independent
variable) and determine the beta for the stock.
(d) Key investment risks: what industry, market, and company-specific factors may result in your
company’s stock being a bad investment?
Solution
(a) assuming face value of bond is $ 1000 & maturity term is 30 years and Zero coupon Bond
Value of the bond is = F/(1+r)t where r = 6% and t =30
= 1000/(1+0.06)30
= 174.1101
(b) assuming that the dividend paid by the company is $ 1 and constant growth rate of dividend
is 10%
then the price of the stock will be P = D /(k -g)
where D =1, k = 12.5% and g = 10%
So, P = 1 / (0.125 - 0.10)
= $ 40
(c) (i) using the constand growth model if the dividend is $ 1 today with 10% of growth
then 5 years back it was $ 0.9057 ( dividend = 1/(1+ 10%/5)5 )
so the price of the stock 5 years back assuming other factors constant
= 0.9057 /(0.125-0.100) = $ 36.2286
so the price os 100 stocks are $ 3622.86
(c) (ii) the stock price today is $ 40
the stock price 5 Years back was $ 36.2286
so avg. return for 5 years are 10% per annum.
