Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Equity Valuation 2 Having done a great job trading Prandium Industries ( EV 1 Case Simulation ) , you have been promoted to start applying
Equity Valuation
Having done a great job trading Prandium Industries EV Case Simulation you have been promoted to start applying the hedge fund's more complex valuation model to a different stock, BoxCars BOXX
This company is currently experiencing growth so the EV valuation model for which EPS and dividends remain constant forever is not applicable. Instead, your fund believes that the appropriate valuation model to use for BOXX is the Gordon dividend growth model.
The Gordon growth model states that the value of a firm's equity shares is equal to the expected value of the firm's future cash flows in the form of dividends discounted by an appropriate equity discount rate less the growth rate of dividends.
During the next trading year your responsibility is to trade BOXX using the fund's model. The following table shows last year's earnings per share, as well as analyst estimates for the next four quarters.
tableLast Year,This YearQAQAQAQAQEQEQEQEEPS
refers to actual and to estimated values.
BOXX has a corporate policy to pay out of its earnings as dividends each quarter. In addition, your hedge fund analyst has told you that the appropriate discount rate to use is the current market riskfree rate plus an equity risk premium for BOXX of Throughout the trading case, you will be able to observe the realtime risk free rate which is labeled RF
In this trading simulation, you can purchase or sell shares of BoxCars BOXX The stock price at the end of the trading case reflects the Gordon growth model, based on that year's dividends, the growth of dividends relative to the previous year, and the equity discount rate:
Where and
The case represents year of calendar time which is simulated over minutes of trading time. There is a position limit of net long or short shares, and a trading fee of cent per share.
Discussion Questions and Follow Up:
Assuming that analyst estimates are the most accurate predictor available for future earnings, what should the starting price per share be for BOXX?
Build an Excel valuation model with the earnings dividends as inputs and link the current riskfree rate to your model by dragging and dropping the LAST value for RF in the RIT Client into your excel sheet.
Given no other information about what drives RF or any forecasts, why is using the realtime RF the best predictor of what the ending value of RF will be
What are the pitfalls of the Gordon growth model, and for which types of stocks would it be
cussion Questions and Follow Up:
Assuming that analyst estimates are the most accurate predictor available for future earnings, what should the starting price per share be for BOXX?
Build an Excel valuation model with the earnings dividends as inputs and link the current riskfree rate to your model by dragging and dropping the LAST value for RF in the RIT Client into your excel sheet.
Given no other information about what drives RF or any forecasts, why is using the realtime the best predictor of what the ending value of RF will be
What are the pitfalls of the Gordon growth model, and for which types of stocks would it be best suited?
Answer the discussion and follow up questions
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started