Company AAA and company BBB operate in the smartphone sector, and have the following information: Company AAA: Beta of company AAA's share is 0.5 Current annual dividend is $1.2 per share Current share price is $15 Company BBB Beta of company BBB's share is 2 Current annual dividend is $1.7 per share Current share price is $20 Required A. Interpret the beta values. Which share would a risk-averse investor invest his/her money in? Explain why? B. Given a risk free rate of 4% and a market portfolio return of 8%, what is the expected return of each company's share? C. Estimate the price per share for each company using the zero dividend growth model. Based on the estimated share price, what recommendation would you make to the share investor (i.e., BUY, HOLD, SELL)? Explain why. D. Assume that the mean of P/E (i.c., share price/carning per share) in the smartphone sector is 10 and that EPS (i.e., earning per share) next year is $1.3 for company AAA and $2 for company BBB, what is the estimated price per share for each company using the earnings capitalisation model? Based on the estimated share price, what recommendation would you make to the share investor? Explain why.

Company AAA and company BBB operate in the smartphone sector, and have the following information: Company AAA: Beta of company AAA's share is 0.5 Current annual dividend is $1.2 per share Current share price is $15 Company BBB Beta of company BBB's share is 2 Current annual dividend is $1.7 per share Current share price is $20 Required A. Interpret the beta values. Which share would a risk-averse investor invest his/her money in? Explain why? B. Given a risk free rate of 4% and a market portfolio return of 8%, what is the expected return of each company's share? C. Estimate the price per share for each company using the zero dividend growth model. Based on the estimated share price, what recommendation would you make to the share investor (i.e., BUY, HOLD, SELL)? Explain why. D. Assume that the mean of P/E (i.c., share price/carning per share) in the smartphone sector is 10 and that EPS (i.e., earning per share) next year is $1.3 for company AAA and $2 for company BBB, what is the estimated price per share for each company using the earnings capitalisation model? Based on the estimated share price, what recommendation would you make to the share investor? Explain why.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Case Study 1: A common measure of the relative value of a company's stock is the price to earnings ratio... A relatively low PE indicates either a relatively undervalued stock or a company expected to have low or even negative future earnings growth, while a relatively high PE indicates either an over-valued stock or a company expected to have robust future earnings growth. Consider the following companies, for which we want to determine the aggregate PE: Company A B с D PE Ratio 22.50 24.20 20.00 60.00 Find the right statistical tool, then state the reason for using that tool.
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USE EXCEL and show cell references.
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