Saltanat Cuadra Farah Mohammad Rasheed Sabrina Naqvi Gloria the Investor 1. Calculate the required rate of return using the Capital Asset Pricing Model (CAPM). RCAPM = Rf + Beta of stock (Rm - Rf ) , where, Rf = Risk free rate of return, here treasury bond return is taken, Rf = 4.30% Rm = return on market, here we taken as broad market return, Rm = 11.90%      (Rm - Rf ) = this can be said be Risk premium , = 0.119-0.043 = 0.076 Considering the above, stockwise RCAPM as below. Rating of stock Rf Beta of stock Market Prenium RCAPM 1 0.043 + 0.65 x 0.076 0.0924 i.e. 9.24 % 2 0.043 + 2.3 x 0.076 0.2178 i.e. 21.78 % 3 0.043 + 1.89 x 0.076 0.18664 i.e. 18.66 % 4 0.043 + 1.2 x 0.076 0.1342 i.e. 13.42 % 5 0.043 + 1.35 x 0.076 0.1456 i.e. 14.56 % 6 0.043 + 0.67 x 0.076 0.09392 i.e. 9.392 % 7 0.043 + 1.78 x 0.076 0.17828 i.e. 17.83 % 8 0.043 + 0.95 x 0.076 0.1152 i.e. 11.52 % 9 0.043 + 0.92 x 0.076 0.11292 i.e. 11.29 % 10 0.043 + 1.5 x 0.076 0.157 i.e. 15.7 % 11 0.043 + 0.85 x 0.076 0.1076 i.e. 10.76 % 12 0.043 + 0.38 x 0.076 0.07188 i.e. 7.188 % 13 0.043 + 0.71 x 0.076 0.09696 i.e. 9.696 % 14 0.043 + 1 x 0.076 0.119 i.e. 11.9 % 15 0.043 + 0.73 x 0.076 0.09848 i.e. 9.848 % 2. Value of stock under constant dividend growth model, P0 = D1 /(Ke-g) , D1 = D0 (1+g), D1 is the dividend receivable after 1 year Rating of stock D0 ($) g D1($) Ke P0 = D0 x g (D1/ke-g) 1 0.95 0.0065 0.956 0.0924 = 11.13 2 0 -1 0.000 0.2178 = 0.00 3 0 0 0.000 0.18664 = 0.00 4 1.3 0.0623 1.381 0.1342 = 19.21 5 0.75 0.0095 0.757 0.1456 = 5.56 6 6 0.05 6.300 0.09392 = 143.44 7 0 0 0.000 0.17828 = 0.00 8 0.75 0.0075 0.756 0.1152 = 7.02 9 0.38 0.0038 0.381 0.11292 = 3.50 10 0 -0.9 0.000 0.157 = 0.00 11 2 0.0225 2.045 0.1076 = 24.03 12 0 -0.01 0.000 0.07188 = 0.00 13 6 0.0525 6.315 0.09696 = 142.04 14 1 0.08 1.080 0.119 = 27.69 15 1.35 0.0885 1.469 0.09848 = 147.24 3. Comparison of market price of stock & stock value computed. Rating of stock (given) Market Price (given) Market Value* Stock value over market price ($) 1 12.05 11.13 -0.92 2 28.02 0.00 -28.02 3 17.75 0.00 -17.75 4 92.43 19.21 -73.22 5 63.79 5.56 -58.23 6 71.11 143.44 72.33 7 10.00 0.00 -10.00 8 49.51 7.02 -42.49 9 101.00 3.50 -97.50 10 39.78 0.00 -39.78 11 29.75 24.03 -5.72 12 73.09 0.00 -73.09 13 20.39 142.04 121.65 14 18.25 27.69 9.44 15 7.00 147.24 140.24 4. What do your results mean for Gloria? Following shall be sequence while investing in these stocks on the basis of stock value computed. Rating of stock (given) Market Price (given) Market Value* Stock value over market price ($) Sequence for investment 15 7.00 147.24 140.24 1 6 71.11 143.44 72.33 2 13 20.39 142.04 121.65 3 14 18.25 27.69 9.44 4 11 29.75 24.03 -5.72 5 4 92.43 19.21 -73.22 6 1 12.05 11.13 -0.92 7 8 49.51 7.02 -42.49 8 5 63.79 5.56 -58.23 9 9 101.00 3.50 -97.50 10 2 28.02 0.00 -28.02 11 3 17.75 0.00 -17.75 12 7 10.00 0.00 -10.00 13 10 39.78 0.00 -39.78 14 12 73.09 0.00 -73.09 15 Discussion Questions: 3. Compare the value.

1. Saltanat Cuadra
Farah Mohammad Rasheed
Sabrina Naqvi
Gloria the Investor
1. Calculate the required rate of return using the Capital Asset
Pricing Model (CAPM).
RCAPM = Rf + Beta of stock (Rm - Rf ) ,
where, Rf = Risk free rate of return, here treasury bond return is
taken, Rf = 4.30%
Rm = return on market, here we taken as broad market return,
Rm = 11.90%
(Rm - Rf ) = this can be said be Risk premium , = 0.119-0.043
= 0.076
Considering the above, stockwise RCAPM as below.
Rating of stock
Rf
Beta of stock
Market Prenium
RCAPM
1
0.043
+
0.65
x
0.076
0.0924
i.e.
9.24

2. %
2
0.043
+
2.3
x
0.076
0.2178
i.e.
21.78
%
3
0.043
+
1.89
x
0.076
0.18664
i.e.
18.66
%
4
0.043
+
1.2
x
0.076
0.1342
i.e.
13.42
%
5
0.043
+
1.35
x

3. 0.076
0.1456
i.e.
14.56
%
6
0.043
+
0.67
x
0.076
0.09392
i.e.
9.392
%
7
0.043
+
1.78
x
0.076
0.17828
i.e.
17.83
%
8
0.043
+
0.95
x
0.076
0.1152
i.e.
11.52
%
9

4. 0.043
+
0.92
x
0.076
0.11292
i.e.
11.29
%
10
0.043
+
1.5
x
0.076
0.157
i.e.
15.7
%
11
0.043
+
0.85
x
0.076
0.1076
i.e.
10.76
%
12
0.043
+
0.38
x
0.076
0.07188

5. i.e.
7.188
%
13
0.043
+
0.71
x
0.076
0.09696
i.e.
9.696
%
14
0.043
+
1
x
0.076
0.119
i.e.
11.9
%
15
0.043
+
0.73
x
0.076
0.09848
i.e.
9.848
%
2. Value of stock under constant dividend growth model,
P0 = D1 /(Ke-g) , D1 = D0 (1+g), D1 is the dividend receivable
after 1 year

6. Rating of stock
D0 ($)
g
D1($)
Ke
P0 =
D0 x g
(D1/ke-g)
1
0.95
0.0065
0.956
0.0924
=
11.13
2
0
-1
0.000
0.2178
=
0.00
3
0
0
0.000
0.18664
=
0.00
4

7. 1.3
0.0623
1.381
0.1342
=
19.21
5
0.75
0.0095
0.757
0.1456
=
5.56
6
6
0.05
6.300
0.09392
=
143.44
7
0
0
0.000
0.17828
=
0.00
8
0.75
0.0075
0.756
0.1152
=
7.02
9
0.38

8. 0.0038
0.381
0.11292
=
3.50
10
0
-0.9
0.000
0.157
=
0.00
11
2
0.0225
2.045
0.1076
=
24.03
12
0
-0.01
0.000
0.07188
=
0.00
13
6
0.0525
6.315
0.09696
=
142.04
14
1
0.08

9. 1.080
0.119
=
27.69
15
1.35
0.0885
1.469
0.09848
=
147.24
3. Comparison of market price of stock & stock value computed.
Rating of stock (given)
Market Price (given)
Market Value*
Stock value over market price ($)
1
12.05
11.13
-0.92
2
28.02
0.00
-28.02
3
17.75
0.00
-17.75
4
92.43
19.21

10. -73.22
5
63.79
5.56
-58.23
6
71.11
143.44
72.33
7
10.00
0.00
-10.00
8
49.51
7.02
-42.49
9
101.00
3.50
-97.50
10
39.78
0.00
-39.78
11
29.75
24.03
-5.72
12
73.09
0.00
-73.09
13
20.39
142.04

11. 121.65
14
18.25
27.69
9.44
15
7.00
147.24
140.24
4. What do your results mean for Gloria?
Following shall be sequence while investing in these stocks on
the basis of stock value computed.
Rating of stock (given)
Market Price (given)
Market Value*
Stock value over market price ($)
Sequence for investment
15
7.00
147.24
140.24
1
6
71.11
143.44

12. 72.33
2
13
20.39
142.04
121.65
3
14
18.25
27.69
9.44
4
11
29.75
24.03
-5.72
5
4
92.43
19.21
-73.22
6
1
12.05
11.13
-0.92
7
8
49.51
7.02
-42.49
8
5
63.79
5.56
-58.23

13. 9
9
101.00
3.50
-97.50
10
2
28.02
0.00
-28.02
11
3
17.75
0.00
-17.75
12
7
10.00
0.00
-10.00
13
10
39.78
0.00
-39.78
14
12
73.09
0.00
-73.09
15
Discussion Questions:
3. Compare the values you calculated in questions 1 & 2. Do the
values closely approximate the stocks market price? If not, why

14. not?
There is a significant difference between intrinsic value and
market value. Intrinsic value is an estimate of the actual true
value of a company. Market value is the value of a company as
reflected by the company's stock price. Therefore, market value
may be significantly higher or lower than the intrinsic value.
4. What do your results mean for Gloria?
Out of the 15 stocks, Gloria can only consider those stocks,
which have high Beta value and high required rate of return.
Also the growth factor is also to be considered in the case. Thus
after calculation and observation of the 15 stocks we can easily
select 5 stocks which Gloria can consider for more profitability
in the business.
5. Are there other options Gloria might consider for valuing
stocks?
The dividend discount model (DDM) is a method of valuing a
company's stock price based on the theory that its stock is worth
the sum of all of its future dividend payments, discounted back
to their present value. The methods used to analyze securities
and make investment decisions fall into two very broad
categories: fundamental analysis and technical analysis.
Fundamental analysis involves analyzing the characteristics of a
company in order to estimate its value. Technical analysis takes
a completely different approach; it doesn't care one bit about
the "value" of a company or a commodity. Technicians are only
interested in the price movements in the market.
6. How does your result affect the “market efficiency” theory?
Market efficiency survives the challenge from the literature on
long-term return anomalies. Consistent with the market
efficiency hypothesis that the anomalies are chance results,
apparent overreaction to information is about as common as
under reaction, and post-event continuation of pre-event
abnormal returns is about as frequent as post-event reversal.
Most important, consistent with the market efficiency
prediction. Basically, the market efficiency theory states that
information asymmetry eventually dissipates, as the information

15. becomes known to investors and public and until the true value
of the stock equates to current market price that apparent
anomalies can be due to methodology, most long-term return
anomalies tend to disappear with reasonable changes in
technique.
Investment Growth Analysis for Gloria - June 19, 2016
Kimberly Huh
Casey Wilkins
Kent Wright
Calculate the required rate of return using the Capital Asset
Pricing Model (CAPM).
* for calculation
risk free = 4.30%
Beta = *retrieved from assignment
expected market return = 11.9%
Require Rate of Return
1
9.2400%
2
21.7800%
3
18.6640%
4
13.4200%
5
14.5600%
6
12.2800%
7
17.8280%
8

16. 11.5200%
9
11.2920%
10
15.7000%
11
10.7600%
12
7.1880%
13
9.6960%
14
13.4200%
15
9.8480%
Using the constant growth formula, calculate the value of each
stock
P = D1/(r-g)
Where P is the value estimate, D0 is the current dividend
amount, D1 is the estimated dividend in year 1, r is the cost of
common stock (or the required return by the shareholders), and
g is the constant growth rate
Constant growth value
Current Stock Price
Difference
1
$11.13
$12.05

17. -8.20%
2
$0.00
$28.02
3
$0.00
$17.75
4
$19.21
$92.43
-381.00%
5
$5.56
$63.79
-1047.00%
6
$0.00
$2.88
7
$0.00
$10.00
8
$6.36
$49.51
-678.00%
9
$46.00
$101.00
-119.00%
10
$0.00
$39.78

18. 11
$24.03
$29.75
-23.00%
12
$0.00
$73.09
13
$142.04
$20.39
696.00%
14
$0.00
$18.25
15
$147.24
$7.00
2100.00%
Compare the values you calculated in questions 1 & 2. Do the
values closely approximate the stocks market price? If not, why
not? No
The calculated stock price does not reflect the current market
prices. The current prices are quite higher than their intrinsic
value which simply means stock value is overvalued. This
difference could be because of high demand of stock which has
increased stock price. These stocks maybe riding on economic
growth. Economic conditions are the state of the economy in a
country or region and are considered to be sound or positive
when an economy is expanding, and are considered to be
adverse or negative when an economy is contracting
(www.investopedia.com). The differences in values (market

19. price vs constant growth value) are pretty high. Mostly, this is
from the lack of dividends and dividend growth produced by a
majority of the stocks. When evaluating the performance of any
investment, it's important to compare it against an appropriate
benchmark (www.investopedia.com). Since the constant growth
formula uses the current dividend and expected increase in
dividends as variables, the lack of these two components really
dampen the accuracy and/or legitimacy of the stock valuations
making this valuation tool non-applicable. However the
companies that are paying a dividend need to have a growth rate
comparable if not exceeding in order to meet the required rate
of return.
What do your results mean for Gloria?
Gloria should pursue and acquire stocks which are undervalued
like stocks 13 and 15. As they are undervalued and their prices
may increase in the future. Even the growth potential of these
companies is higher. Gloria should also look at growth patterns
and risk factor. Companies that are having a negative growth
rate may not perform well in near future and higher beta means
that more risk involved. As a risk averse investor she should
focus on companies with a higher return and lower risk. Once
again what this means is that according to these numbers alone,
only two of the fifteen stocks are "undervalued" and that she
should pursue alternate methods of research for these stocks as
there are possibly other and more appropriate methods for
valuation. (Alternatively, this could also mean Mr. Bill is a big
fat liar and is bad at his job). Unscrupulous investment advice
is something Gloria should look at as well (Hunter, 2006).
Are there other options Gloria might consider for valuing
stocks?
The one constant growth model is not enough as some
companies are not paying dividends. Dividend and growth are
not the only measures which reflect intrinsic values. Gloria
could also calculate stock price through:
* FCFF (Free Cash Flow from Firm)
* FCFE (Free Cash Flow to Equity)

20. * Residual Income model
*Discounted Cash Flow Model
* Excess returns model
* Adjusted Present Value
* Relative Valuation
* Standardized values and multiples model
Comparing company's in the same sector would allow her to
create standardized multiples defined by:
Definitional Test- Even the simplest multiples are defined
differently by different analysts. Consider, for instance, the
price-earnings (P/E) ratio, the most widely used multiple in
valuation. Analysts define it to be the market price divided
by the earnings per share, but that is where the consensus
ends.
Descriptional - When using a multiple, it is always useful
to have a sense of what a high value, a low value, or a typical
value for that multiple is in the market. In other words, knowing
the distributional characteristics of a multiple is a key part of
using that multiple to identify under- or overvalued firms.
Analytical- In discussing why analysts were so fond of
using multiples, it is argued that relative valuations require
fewer assumptions than discounted cash flow valuations. The
difference is that the assumptions in a relative valuation are
implicit and unstated, whereas those in discounted cash flow
valuation are explicit and stated.
Application-When multiples are used, they tend to be used
in conjunction with comparable firms to determine the value
of a firm or its equity. In addition, no matter how carefully we
choose comparable firms, differences will remain between
the firm we are valuing and the comparable firms
(Damodaran, 2006).
Essentially throwing darts at a board is what is happening now.
Without comparison, we are not sure whether non dividend
paying companies will be better choice or not.
How does your result affect the “market efficiency” theory?

21. Market efficiency theory says it is impossible to beat the market
which makes us uncertain that our decision to invest in
undervalued could result in Gloria's favour. As there will be a
lot of other investors looking for undervalued stock. Such
increase in demand could increase stock price, eliminate any
gain and bring price equal to its intrinsic value. But it is not
necessary so as everyone in the market does not possess entire
available information and there is always a chance to gain a bit.
Periods marked by high arbitrage flows are periods during
which markets are more efficient. These periods are likely to
see a correction of cross-sectional mispricing, resulting in lower
returns for quantitative strategies in the future (Akbas, 2016).
Plus an efficient market is subject to rational investors.
Rational investors, we are told, have adequate information to
make investment decisions and act on that information,
rationally and in their own best interest. They also make
lifestyle choices, generally preferring aggressive portfolios
early in their lives, and gradually becoming more conservative
as they near retirement (Basu, 2008).
References
Akbas, F., Armstrong, W. J., Sorescu, S., & Subrahmanyam, A.
(2016). Capital Market Efficiency and Arbitrage
Efficacy. Journal Of Financial & Quantitative Analysis, 51(2),
387-413. doi:10.1017/S0022109016000223
Basu, S., Raj, M., & Tchalian, H. (2008). A Comprehensive
Study of Behavioral Finance. Journal Of Financial Service
Professionals, 62(4), 51-62
Damodaran, Aswath. ( © 2006). Damodaran on valuation:
security analysis for investment and corporate finance,
second edition. [Books24x7 version] Available
fromhttp://common.books24x7.com.ezproxy.umuc.edu/toc.
aspx?bookid=16748.
Hunter, T. (2006). 'The sell sell sell crowd are back again'
Unscrupulous financial advisers have been accused of

22. choosing investments that pay them the biggest commissions
rather than deliver the best returns for clients. Teresa Hunter
reports.Sunday Telegraph (London, England).