1.Choose 10 firms that interest you and download their financial statements fromfinance.yahoo.com.

a.For each firm, find the return on equity (ROE), the number of shares outstanding, the dividends per share, and the net income. Record them in a spreadsheet.

b.Calculate the total amount of dividends paid (dividends per share number of shares outstanding), the dividend payout ratio (total dividends paid/net income), and the plowback ratio (1 dividend payout ratio).

c.Compute the sustainable growth rate,g=b ROE, wherebequals the plowback ratio.

d.Compare the growth rates (g) with the P/E ratios of the firms by plotting the P/Es against the growth rates in a scatter diagram. Is there a relationship between the two?

e.Using data from financial statements, find or calculate the ratios of price-to-book, price-to-sales, and price-to-cash flow from operations for each firm in your sample. Use a

line chart to plot these three ratios on the same set of axes. What relationships do you see among the three series?

f.For each firm, compare the three-year growth rate of earnings per share with the growth rate you calculated above. Is the actual rate of earnings growth correlated with the sustainable growth rate you calculated?

2.Now calculate the intrinsic value of three of the firms you selected in the previous question. 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 firm based on the CAPM? You can get the beta of each firm from itsKey Statisticspage.

b.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 find assuming a constant-growth rate. Which estimate seems more reasonable for each firm?

3.Now choose one of your firms and look up other firms in the same industry. Perform a "Valuation by Comparables" analysis by looking at the price/earnings, price/book value, price/sales, and price/operating cash flow ratios of the firms relative to each other and to the industry average. Which of the firms seem to be overvalued? Which seem to be undervalued? Can you think of reasons for any apparent mispricings?

4.The actual expected return on a stock based on estimates of future dividends and future price can be compared to the "required" or equilibrium return given its risk. If the expected return is greater than the required return, the stock may be an attractive investment.

a.First calculate the expected holding-period return (HPR) on Target Corporation's stock based on its current price, its expected price, and its expected dividend.

i.

Get information for Target (enter TGT under quote search). From theAnalyst Opinionpage, find the range for estimated target price for the next fiscal year.

ii.

Collect information about today's price and the dividend rate. What is the company's expected dividend in dollars for the next fiscal year?

iii.

Use these inputs to calculate the range of Target's HPR for the next year.

b.

Page 442

Calculate the required return based on the capital asset pricing model (CAPM).

i.

Use a risk-free rate from Yahoo'sMarket Datapage.

ii.

Use the beta coefficient shown in theKey Statisticspage.

iii.

Calculate the historical return on a broad-based market index of your choice. You may use any time period that you deem appropriate. Your goal is to derive an estimate of the expected return on the market index for the coming year.

iv.

Use the data you've collected as inputs for the CAPM to find the required rate of return for Target Corporation.

c.

Compare the expected HPR you calculated in part (a) to the required CAPM return you calculated in part (b). What is your best judgment about the stock's current statusdo you think it is selling at an appropriate price?

Selected 10 firms:

HPQ

CSCO

ADSK

MCHP

DXC

GOOG

AAPL

AVGO

GPN

TXN