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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Some investors use the Sharpe ratio as a way of comparing the benefits of owning shares of stock in a company to the risks. The Sharpe ratio of a stock is defined as the ratio of the difference between the mean return on the stock and the mean return on government bonds (called the risk-free rate rf ) to the SD of the returns on the stock. The mean return on government bonds is rf = 0.03% per day. The table below describes the daily return of three stocks. Date APPLE. TESLA GM 01/10/20 0.85% 4.46% 2.67% 02/10/20 -3.23% - 7.38% 0.26% 05/10/20 3.08% 2.55% 1.64% 06/10/20 -2.87% -2.75% -1.81% 07/10/20 1.70% 2.73% 4.01% 08/10/20 -0.10% 0.15% 1.87% 09/10/20 1.74% 1.90% -0.16% 12/10/20 6.35% 1.91% 0.16% 13/10/20 -2.65% 0.98% -1.06% 14/10/20 0.07% 3.28% -0.63% 15/10/20 -0.40% -2.69% 2.90% 16/10/20 -1.40% -2.05%…
1 The information regarding the risk level of three different stocks is presented below. 1. Which stock has the highest level of risk? Interpret the beta of that stock. 2. Which stock has the level of risk that is closest to the market level of risk? How do we measure the market level of risk? Beta Standard Deviation Flylnc 2.1 15.8% Airco 1.1 17.3% SkyCorp 0.8 21.5%
q2- This question relates to Diagram 2 from the Online Quiz 9.4 diagrams, which shows the Security Market Line. A share has a beta of 0.5 and, based on it's current price, has an expected return of 5%. Based on the CAPM, is the share overpriced, underpriced or correctly priced? Select one: a. Unable to determine without more information. b. Correctly priced c. Overpriced d. Underpriced
man.3 Imagine you are a CFO of a company that is publicly traded in stock exchange and has one of the smallest market capitalisations among all the companies available at the stock market. Assume that a risk-free rate is 2%, average return on broadly defined stock index is 12% and according to your computations the company has a market beta of 1.5. Estimate the cost of equity capital for your company and discuss, in the light of the empirical findings on the performance of CAPM and the existing anomalies, the quality of your investment decisions when using this value for the purpose of project evaluation. The expected return on the firm's equity is:
You are thinking about investing in either X corp, or Y corp. Based on the following market measures, which company could be the best option based on possible return of investment? x y Price/Earnings Ratio 10.39 12.27 Earnings per Common Share 3.5 5.4 Divident Payout .464 .320
Which of the following is the best reason why the price-earnings method is often used by investors to estimate the fair price of a stock? a) Because the earning multiples are easily found in online financial databases. b) Earnings per share is a known amount that is related to the payment of future dividends. c) Because the price-earnings method gives the same answer as the constant growth method and is easier to compute. d) The price-earnings method has been shown to provide the most accurate price estimate.
For purposes of the Stock Market Game and real-life comparisons as to how an investment has performed vs another investment choice, we use Return On Investment (ROI) as the measuring stick to see which has performed better. Calculate the ROI for the following scenario If you bought 100 shares of Pepsi for $18/share and then sold all 100 shares for $90/share What would be the ROI as a %? Remember to move your decimal to get a % O 20% O .2% O 2% O 25%
5. Changes to the security market line The following graph plots the current security market line (SML) and indicates the return that investors require from holding stock from Happy Corp. (HC). Based on the graph, complete the table that follows: 20.0 REQUIRED RATE OF RETURN (Percent) 6 18.0 12.0 60 0.5 1.0 RISK (Beta) Retum on HC's Stock 20
The following graph plots the current security market line (SML) and indicates the return that investors require from holding stock from Happy Corp. (HC). Based on the graph, complete the table that follows: 00.51.01.52.020.016.012.08.04.00REQUIRED RATE OF RETURN (Percent)RISK (Beta)Return on HC's Stock CAPM Elements Value Risk-free rate (rRFrRF) Market risk premium (RPMRPM) Happy Corp. stock’s beta Required rate of return on Happy Corp. stock An analyst believes that inflation is going to increase by 2.0% over the next year, while the market risk premium will be unchanged. The analyst uses the Capital Asset Pricing Model (CAPM). The following graph plots the current SML. Calculate Happy Corp.’s new required return. Then, on the graph, use the green points (rectangle symbols) to plot the new SML suggested by this analyst’s prediction. Happy Corp.’s new required rate of return is . Tool tip: Mouse over the points on…
O Below is the stock price and dividend history for No-Cameras-Allowed Inc. (NCA), a company organizing Las Vegas retreats for investment banks. Stock Price (end-of-year) Dividend (paid during the year) Year 2019 90 180 18 2020 2021 120 6. a. Compute the annual return in 2020 and 2021. b. Compute the arithmetic average return over the 2019–2021 period. c. Compute the geometric average return over the 2019–2021 period. d. You buy 2,000 shares of NCA at the end of 2019 and hold them through the end of 2021. You reinvest any dividends received (i.e., you use the dividend proceeds to buy more shares of NCA). Except for reinvestment of dividends, you neither buy nor sell any shares before the end of 2021. Which average, arithmetic or geometric, better captures your investment performance over the 2019–2021 period? Please provide a brief explanation for your answer. B Focus MacBook Pro
Compute Topp Company's price-earnings (PE) ratio if its common stock has a market value of $22.20 per share and its earnings per share (EPS) is $4.00. Topp's key competitor, Lower Deck, has a price-earnings (PE) ratio of 9.5. For which company does the market have higher expectations of future performance? Complete this question by entering your answers in the tabs below. Price Earnings Ratio Future Performance Compute Topp Company's price-earnings (PE) ratio if its common stock has a market value of $22.20 per share and its earnings per share (EPS) is $4.00. Choose Numerator: Price Earnings Ratio 1 Choose Denominator: 1 1 Price Earnings Ratio = Price Earnings Ratio
The discounted cash flow model and the corporate valuation model are the most widely used valuation techniques. Often these valuations are accompanied by market multiple analysis, which is based on the fundamental concept that sinar assets should have simlar values. Carlson Co, is a privately owned firm with few investors. Investors forecast their eamings per share (EPS) to reach $3 this coming year The average price-to-earnings (P/E) ratio for similar companies in the S&P 500 is 11. The estimated intrinsic value of Carlson Co.'s stock will be Market multiple analysis is also used to calculate the value of a company, which is further used to calculate the intrinsic vakre per share of the fim Suppose you have the information given in the following table for Company X. EBITDA Total value of equity Total firm value per share. Year 1 Year 2 $10,680 $12,375 $121,500 $112,500 $182,250 $202,500

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