Question

pboard Paragraph Based on the following table, select one company that appears to be undervalued and explain your reasons. 5 Pts Factors PE ratio Price to book value ratio Price to sales ratio Stock A 10 2.1 Stock B 12 2.2 0.3 0.3 Based on information below, select one company that has a better value to you as an investor and explain your reasons. Assume that dollar dividends will remain the same and both companies are alike and are in the same industry 3. 5Pts Stock C stock D Factor Dividend yield Calculate price or fair value for the following company. 6.5% 3.25% 4. 10 Pts Normal growth rate for the future-3.5% Excess or super growth rate for the next 8 Current dividend $2.40 9%

Answer 1

1.

Stock A is better value to the investor as it has lower PE ratio and Price to book ratio

2.

Dollar dividend are same

Price=Dollar dividend/Dividend yield

Higher dividend yield will have lower price and hence beter value

So Stock C is better value

3.

=2.4*1.09/1.1+2.4*(1.09/1.1)^2+2.4*(1.09/1.1)^3+2.4*(1.09/1.1)^4+2.4*(1.09/1.1)^5+2.4*(1.09/1.1)^6+2.4*(1.09/1.1)^7+2.4*(1.09/1.1)^8++2.4*(1.09/1.1)^8*1.035/(10%-3.5%)

=53.95390796

4.

Beta measures the sensitivity of stock with respect to the market

In the context of CAPM: required return=Beta*risk premium+risk free rate