Business Administration - Financial Planning RFC225 Lecture Notes - Lecture 1: Dividend Discount Model, Forest Product, Technical Analysis

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greenmuskrat329

11 Jan 2017

School

Seneca College

Department

Business Administration - Financial Planning

Course

Business Administration - Financial Planning RFC225

Professor

Peter Wan

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Document Summary

Examples: forest product = lumber, metal, chemicals. Dividend discount model ddm: growth on dividend, stock price = expected dividend [for 1 year]/required rate of return growth [growth of dividend, required rate of return and growth = ex. 9% = 0. 09: wacc = weighted average costs of capital. Stock price/market price: dividend already discounted from the stock. Stock price of a company will have a trend for the pricing: up, down, sideways. History will repeat itself: what go up will go down, what go down will go up. Long term is based on supply and demand of the company stock. Technical analysis = entry and exit point: most common: chart analysis. Most common is bar chart = trading rate of the stock in a day. 13-20: draw a line between the lowest prices for a time frame = support, draw a line between the highest prices for a time frame = resistance. Go back and forth to the neck line.

Related Questions

Frey Corp. is experiencing rapid growth. Dividends are expected to grow at 26 percent per year during the next three years, 16 percent over the following year, and then 6 percent per year indefinitely. The required return on this stock is 15 percent, and the stock currently sells for $74 per share. What is the projected dividend for the coming year? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Projected dividend

You have found the following stock quote for RJW Enterprises, Inc., in the financial pages of todayâs newspaper.

What was the closing price for this stock that appeared in yesterdayâs paper? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Yesterdayâs closing price

If the company currently has 17 million shares of stock outstanding, what was net income for the most recent four quarters? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Net income

Storico Co. just paid a dividend of $1.65 per share. The company will increase its dividend by 24 percent next year and will then reduce its dividend growth rate by 6 percentage points per year until it reaches the industry average of 6 percent dividend growth, after which the company will keep a constant growth rate forever. If the stock price is $42.54, what required return must investors be demanding on Storico stock? (Hint: Set up the valuation formula with all the relevant cash flows, and use trial and error to find the unknown rate of return.) (Do not round intermediate calculations and round your final answer to 1 decimal place. (e.g., 32.16))

Required return

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Projected dividend

4. 4.

value:
2.00 points

You have found the following stock quote for RJW Enterprises, Inc., in the financial pages of todayâs newspaper.

What was the closing price for this stock that appeared in yesterdayâs paper? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Yesterdayâs closing price

Net income

Required return

pinkwalrus636

Sabrina Gupta, an investment advisor with a major brokerage firm, was examining Wal-Mart Stores, Inc. (Wal-Mart) stock and its valuation. Gupta wondered whether to recommend the stock to any of her new clients or to existing clients who did not currently have Wal-Mart in their portfolios.

Her key task was to use an intrinsic value approach to price the shares and to then compare the resulting price with the price at which the stock was traded in the market. Gupta wanted to use alternative valuation methods and assumptions to produce intrinsic value estimates for Wal-Mart stock.

She was interested in seeing if the alternative methods would point to a consensus regarding the valuation of the stock and to see if the valuations suggested an investment opportunity given the current market price. Methods she contemplated to use were:

Multi-stage growth model

Price Earnings Multiple

Most valuation methods Gupta considered required a common set of inputs:

Future Cash Flows to Wal-Mart Investors

Growth rate of future cash flows

Discount factor or required rate of return by Wal-Mart investors

Gupta gathered data to determine each of the above.

Gupta thought that Dividends to Wal-Mart shareholders would adequately capture the cash flows to Wal-Mart shareholders; she also thought that this approach would simplify her task and she would revisit more complex valuation models if she felt the need.

Gupta thought that CAPM would provide her a relatively reliable estimate of the required rate of return. CAPM based required rate of return can be estimated by using a risk free rate, systematic risk of the firm and equity market risk premium. Gupta thought that in a valuation exercise that involve long term cash flows, 10-year government bond yield would be an appropriate risk free rate of return estimate. She checked the 10 year note rate and found out that it was about 3.68%. Gupta searched for Wal-Mart beta in Bloomberg. Bloomberg estimates betas by regressing the S&P 500 returns on the firm returns over the past two years and arrives at a ârawâ beta estimate. Bloomberg makes an adjustment in raw beta based on some academic research. Gupta is confident that Bloomberg adjustment is justified and she uses Wal-Mart beta estimate of 0.66 in her analysis.

While Gupta is aware of the importance of EMRP assumption, she thinks that Bloombergâs historical estimate of 5.05% is a safe assumption. She is aware of the fact that some studies suggest a larger risk premium of approximately six per cent, while others suggest a much lower forward-looking premium of less than four per cent. She is mindful of the arbitrariness of her assumption, and she takes a note to revisit this issue if her valuations produce unreasonable estimates.

Anticipated dividend growth (g) is often estimated in a variety of ways.

First, observed historical dividend growth can be assumed to continue in a perpetual fashion.

Second, future dividend growth can be estimated on the basis of recent estimates of analysts.

Gupta noted that the consensus annual Wal-Mart dividend for fiscal year 2011 was $1.21, and one respected analyst had estimated the expected constant dividend growth (in perpetuity) at approximately 3%.

As the chart suggests, both earnings and dividend growth rates are declining but they seem to be higher than the ârespected analystâsâ estimates. Gupta decides to use several alternative perpetual growth assumptions to see the impact on price. Since Gupta decided to use variants of dividend discount model (DDM), she checked the anticipated earnings for 2011. Analystâs estimates suggested $4.10 earnings per share. Gupta decided to use 10% growth rate from 2011 to 2012 and assumed a steady decline to 3% in 13 years (until 2024) where the perpetual growth rate of 3% resumes. She also assumed that WalMart will increase its dividend payout ratio from 30% to 55% from years 2012 to 2024. You are asked to reproduce Guptaâs analysis of multi-stage growth model and double check her valuation by using an earnings multiple. You have all the data you need to conduct the multi stage discounted growth model analysis, but you will need to do some research about the multiples valuation.

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Business Administration - Financial Planning RFC225 Lecture Notes - Lecture 1: Dividend Discount Model, Forest Product, Technical Analysis

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