Use the data from Market Insight to estimate the intrinsic values of three firms from your sample. Use the firms’ betas from the S&P Stock Report section. Make reasonable judgments about the market risk premium and the risk-free rate or find estimates from the Internet.

a. What is the required return on each fi rm based on the CAPM?

b. Look in the Valuation Data section of the Excel Analytics menu. Find the forecasted price for next year. Use the forecasted price, information about dividends

•

•

•

(collected in the previous problem), and the CAPM required return to calculate the intrinsic value of the stock today. How does this compare to the stock’s current market price?

c. Try using a two-stage growth model, making reasonable assumptions about how future growth rates will differ from current growth rates. Compare the intrinsic values derived from the two-stage model to the intrinsic values you found assuming a constant-growth rate. Which estimate seems more reasonable for each fi rm? LO.1