Now calculate the intrinsic value of three of the firms you selected in the previous question. Make reasonable judgments about the market risk premium and the risk-free rate, or find estimates from the Internet.
10 pages Finance Project
Chapter 3
2. Now calculate the intrinsic value of three of the firms you selected in the previous question. Make reasonable judgments about the market risk premium and the risk-free rate, or find estimates from the Internet.
a. What is the required return on each firm based on the CAPM?
b. Try using a two-stage growth model, making reasonable assumptions about how future growth rates will differ from current growth rates. Compare the intrinsic values derived from the twostage model to the intrinsic values you find assuming a constant-growth rate. Which estimate seems more reasonable for each firm?
3. Now choose one of your firms and look up the other firms in the same industry. Perform a “Valuation by Comparables” analysis by looking at the price/earnings, price/book value, price/sales, and price/cash flow ratios of the firms relative to each other and to the industry average. Which of the firms seem to be overvalued? Which seem to be undervalued? Can you think of reasons for any apparent mispricings?
4.The actually expected return on a stock based on estimates of future dividends and future price can be compared to the “required” or equilibrium return given its risk. If the expected return is greater than the required return, the stock may be an attractive investment.
a. First calculate the expected holding-period return (HPR) on Target Corporation’s stock based on its current price, its expected price and its expected dividend.
i. Go to moneycentral.msn.com/investor/home.asp and link to the Stock Research Wizard. Enter “TGT” to find information about Target Corporation. Find the average estimated target price for the next fiscal year.
ii. ClickontheCompanyReportlinkandcollectinformationabouttoday’spriceandthe dividend rate. Calculate the company’s expected dividend in dollars for the next fiscal year. iii. Use these inputs to calculate Target’s expected HPR for the next year. b. Calculate the required return based on the capital asset pricing model (CAPM). i. Use a risk-free rate from moneycentral.msn.com/investor/market/treasuries.aspx.
ii. Use the beta coefficient shown in Target’s Company Report.
iii. Calculate the historical return on a broad-based market index of your choice. You may use any time period that you deem appropriate. Your goal is to derive an esti- mate of the expected return on the market index for the coming year.
iv. Use the data you’ve collected as inputs for the CAPM to find the required rate of return for Target Corporation. c. Compare the expected HPR you calculated in part (a) to the required CAPM return you calculated in part (b). What is your best judgment about the stock’s current status—do you think it is selling at an appropriate price?
Chapter 4
1. Go to finance.yahoo.com to find information about Vulcan Materials Company (VMC), Southwest Airlines (LUV), Honda Motor Company (HMC), Nordstrom, Inc. (JWN), and Abbott Laboratories (ABT). Download the most recent income statement and balance sheet for each company.
a. Calculate the operating profit margin (operating profit/sales) and the asset turnover (sales/assets) for each firm.
b. Calculate the return on assets directly (ROA 5 Operating profit/Total assets), and then confirm it by calculating ROA 5 Operating margin 3 Asset turnover.
c. In what industries do these firms operate? Do the ratios make sense when you consider the industry types?
d. For the firms that have relatively low ROAs, does the source of the problem seem to be the operating profit margin, the asset turnover, or both?
e. Calculate the return on equity (ROE 5 Net income/Equity) for each firm. For the two firms with the lowest ROEs, perform a DuPont analysis to isolate the source(s) of the problem.
2. From the Investing tab, select Industries and then the Toys & Games industry. Pick two companies from the list and do the following for each firm:
a. Retrieve the latest annual balance sheet for each company. Calculate the common-size percentages for the balance sheet in the new column.
b. Compare the firms’ investments in accounts receivable, inventory, and net plant, property, and equipment. Which firm has more invested in these items on a percentage basis?
c. Compare the firms’ investments in current liabilities and long-term liabilities. Does one firm have a significantly higher burden in either of these areas?
d. Analyze the firms’ capital structures by examining the debt ratios and the percentages of preferred and common equity. How much do the firms’ capital structures differ from each other?
3. Select a company of interest to you and link to its annual cash flow statement under the company’s Financial tab. Answer the following questions about the firm’s cash flow activities.
a. Did the firm have positive or negative cash flow from operations? b. Did the firm invest in or sell off long-term investments?
c. What were the major sources of financing for the firm?
d. What was the net change in cash?
e. Did exchange rates have any effect on the firm’s cash flows? Now answer these questions:
f. How liquid is the firm? g. How well is the firm using its assets? h. How effectively is the firm using leverage? i. Is the firm profitable?
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