Analysis Questions of Stock Valuation (3 marks) The "stock valuation model" referred to in the questions below relate to the whether the fundamental value is estimated with the dividend growth model or the residual income model, AND whether the growth rate is estimated with the historical growth rate or the sustainable growth rate. These estimates of the fundamental value are in the last four rows of the table above. Suppose the current price of ABC stock is as given in the table above, and the current price of XYZ stock is as given in the table above. 1. Assume dividends will continue to grow at the same rate for ABC stock a. Explain which stock valuation model(s) you would choose? b. Given the current price, should you buy or sell ABC stock? 2. Suppose ABC has changed its products, and dividends will not grow at the same rate. a. Explain which stock valuation model(s) you would choose? b. Given the current price, should you buy or sell ABC stock? 3. Recall XYZ is a new company. a. Explain which stock valuation model(s) you would choose? b. Given the current price, should you buy or sell XYZ? Discussion Question on Market Efficiency (2 marks) Consider the following statements from two different investors regarding their strategies for investment. Assuming the stock market is efficient, which investor has the best strategy? Be sure to fully explain your answer. Investor Investor 2 My strategy is to find companies that are My strategy is to invest in mutual fund undervalued. Because they are undervalued, I representing the overall stock market . I do not expect these companies to experience a lot of believe I know that much more than all other growth. And I have been pretty successful at investors, so the stock price we see in the it. About 50% of the time, I am correct in market is probably a good indicator of the choosing undervalued stock. fundamental value of the stock. So there is no use in trying to find undervalued or overvalued stocks Analysis Questions of Stock Valuation (3 marks) The "stock valuation model" referred to in the questions below relate to the whether the fundamental value is estimated with the dividend growth model or the residual income model, AND whether the growth rate is estimated with the historical growth rate or the sustainable growth rate. These estimates of the fundamental value are in the last four rows of the table above. Suppose the current price of ABC stock is as given in the table above, and the current price of XYZ stock is as given in the table above. 1. Assume dividends will continue to grow at the same rate for ABC stock a. Explain which stock valuation model(s) you would choose? b. Given the current price, should you buy or sell ABC stock? 2. Suppose ABC has changed its products, and dividends will not grow at the same rate. a. Explain which stock valuation model(s) you would choose? b. Given the current price, should you buy or sell ABC stock? 3. Recall XYZ is a new company. a. Explain which stock valuation model(s) you would choose? b. Given the current price, should you buy or sell XYZ? Discussion Question on Market Efficiency (2 marks) Consider the following statements from two different investors regarding their strategies for investment. Assuming the stock market is efficient, which investor has the best strategy? Be sure to fully explain your answer. Investor Investor 2 My strategy is to find companies that are My strategy is to invest in mutual fund undervalued. Because they are undervalued, I representing the overall stock market . I do not expect these companies to experience a lot of believe I know that much more than all other growth. And I have been pretty successful at investors, so the stock price we see in the it. About 50% of the time, I am correct in market is probably a good indicator of the choosing undervalued stock. fundamental value of the stock. So there is no use in trying to find undervalued or overvalued stocks
