Consider two stocks for two companies, ABC and XYZ companies. The relevant data for each ABC 495 0.03 2 0.07 XYZ 133 0.03 1.5 0.07 30 Current Price Risk free rate Beta Stock market premium Dividend in March 1990 Dividend in March 2020 Return on equity Payout ratio Eamings per share (EPS) Book value 60 XYZ is a new company. It has not yet paid dividends 0.15 0.7 80 0.2 0 15 550 130 . Calculation Questions on Stock Valuation (5 marks) For each company find the following Enter only the final number. Include a separate document that shows your work. The necessary formulas are as follows: Discount rate; r = risk-free rats + B. stock market premium The growth rate of dividends (or EPS) Historical growth rate (geometric mean): g = -1 Net Income o Sustainable growth rate: g = ROR*(1- Payout ratio), where ROE = Equity Stock Valuation Model: Constant growth rate of dividends...P= D.(1+12 Residual income model: P = IPS (1+0)-Boe where EPS is earnings per share, and B is the book value of assets. . ABC 0.17 Discount rate Historical growth rate of dividends XYZ 0.135 Not available. Cannot compute without dividends Not available. Cannot compute without dividends Not available. Cannot compute without dividends Sustainable growth rate Fundamental value using dividend growth model with the historical growth rate Fundamental value using the dividend growth model with the sustainable growth rate Fundamental value using residual income growth model with the historical growth rate Fundamental value using the residual income growth model with the sustainable Not available. Cannot compute without dividends Aralysis Questions of Stock Valucation (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 of 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 Eficiency (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 filly explain your answer. Investor Investor 2 strategy is to find comparties that are y strategy is to invest in mutual fund widervalued. Because they are undervalued, I representing the overall stock market. I do not expect these companies to experience a lot of believe I bow that much more than all other growth and I have been pretty successful at investors, so the stock price we see in the # About 50% of the time, I am correct in market is probably a good mdicator of the choosing undervalued stock, fundamental value of the stock So there is no use in big to find ondervalued or overvalued stock: Consider two stocks for two companies, ABC and XYZ companies. The relevant data for each ABC 495 0.03 2 0.07 XYZ 133 0.03 1.5 0.07 30 Current Price Risk free rate Beta Stock market premium Dividend in March 1990 Dividend in March 2020 Return on equity Payout ratio Eamings per share (EPS) Book value 60 XYZ is a new company. It has not yet paid dividends 0.15 0.7 80 0.2 0 15 550 130 . Calculation Questions on Stock Valuation (5 marks) For each company find the following Enter only the final number. Include a separate document that shows your work. The necessary formulas are as follows: Discount rate; r = risk-free rats + B. stock market premium The growth rate of dividends (or EPS) Historical growth rate (geometric mean): g = -1 Net Income o Sustainable growth rate: g = ROR*(1- Payout ratio), where ROE = Equity Stock Valuation Model: Constant growth rate of dividends...P= D.(1+12 Residual income model: P = IPS (1+0)-Boe where EPS is earnings per share, and B is the book value of assets. . ABC 0.17 Discount rate Historical growth rate of dividends XYZ 0.135 Not available. Cannot compute without dividends Not available. Cannot compute without dividends Not available. Cannot compute without dividends Sustainable growth rate Fundamental value using dividend growth model with the historical growth rate Fundamental value using the dividend growth model with the sustainable growth rate Fundamental value using residual income growth model with the historical growth rate Fundamental value using the residual income growth model with the sustainable Not available. Cannot compute without dividends Aralysis Questions of Stock Valucation (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 of 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 Eficiency (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 filly explain your answer. Investor Investor 2 strategy is to find comparties that are y strategy is to invest in mutual fund widervalued. Because they are undervalued, I representing the overall stock market. I do not expect these companies to experience a lot of believe I bow that much more than all other growth and I have been pretty successful at investors, so the stock price we see in the # About 50% of the time, I am correct in market is probably a good mdicator of the choosing undervalued stock, fundamental value of the stock So there is no use in big to find ondervalued or overvalued stock