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The document discusses various models for valuing stocks, including dividend discount models, the constant dividend growth model, multi-stage growth models, and the free cash flow model. It also covers weaknesses of dividend discount models and valuation multiples used to measure the intrinsic value of a firm's equity, such as price/earnings ratios and dividend yields. Security analysis involves firm-level, industry, and macroeconomic analysis.

Investments Chapter 15: Stocks: Valuation and Selection

Dividend Discount Models (DDMs) ,[object Object]

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The Constant Dividend Growth Model: I ,[object Object],[object Object]

The Constant Dividend Growth Model: II ,[object Object]

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Valuation Multiples: I ,[object Object],[object Object]

Valuation Multiples: II ,[object Object],[object Object],[object Object]

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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.

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