2. Use the data from Market Insight (www.mhhe.com/edumarketinsight) to do the following:

a. Estimate the intrinsic value of one firm from the Population sample. You will need to calculate the firm’s beta from the historical return series, which is available in the Excel Analytics section, under the Monthly Adjusted Prices link in the Market Data section. Use the monthly returns for the firm and for the S&P 500 index for all months provided. You will also need to make reasonable judgments about the market risk premium, the firm’s long-term growth rate based on recent profitability, and the firm’s plowback ratio.

b. How does the intrinsic value that you calculated compare to the stock’s current price? Is the stock overvalued, undervalued, or correctly priced according to your estimate?

c. How sensitive is your estimate to the assumptions you made? Which assumptions are most critical? You can test this by changing various inputs and checking the results.

d. Redo your analysis using a two-stage growth model and then a three-stage growth model. You will need to make reasonable assumptions about the future growth rates of dividends. Compare the values derived from all three models.

Which estimate seems to be most reasonable? Why?