Question
John Hult, CFA is a financial analyst who works for Arqam Capital. He was asked by the Chief Investment Officer to determine if the stock
John Hult, CFA is a financial analyst who works for Arqam Capital. He was asked by the Chief Investment Officer to determine if the stock of HSBC Holdings plc is fairly valued. Accordingly, John decided to use the dividend discounting model for the valuation of HSBC Holdings plc.Using the Bloomberg terminal, John was able to extract the following figures in addition to the latest information of the firm's last filing.
Weekly Data
FTSE 100 Data
HSBC Data
Date
Open
High
Low
Adjusted Close*
Open
High
Low
Adjusted Close*
2/8/2018
4,949.03
4,989.50
4,900.05
4,900.39
18.03
18.69
18.01
17.35
2/15/2018
4,950.53
4,988.63
4,939.87
4,981.51
18.05
18.71
18.09
18.35
2/22/2018
4,994.00
5,022.10
4,990.15
4,993.32
18.02
19.32
17.94
20.28
3/1/2018
4,997.88
5,013.08
4,986.06
4,999.60
18.22
18.51
18.01
19.48
3/8/2018
5,006.05
5,006.05
4,958.88
4,974.26
19.53
19.92
19.38
19.5
3/15/2018
4,980.05
4,989.30
4,966.05
4,985.48
19.33
19.46
19.18
19.41
3/22/2018
4,969.11
5,005.06
4,953.57
4,984.70
18.41
18.63
18.17
22.57
*The adjusted close values are adjusted for dividends and stock splits.
Upon a recent study conducted by several analysts, there was a consensus that HSBC Holdings plc is considered in the maturity phase. Moreover, the firm is anticipated to maintain a stable payout in the near future regardless of the discretionary maintenance investments that usually align with any maturity phase.
HSBC Holdings plc
Year
DPS
2008
2.10
2009
2.10
2010
2.20
2011
2.35
2012
2.05
2013
2.40
2014
2.55
2015
2.65
2016
2.70
2017
2.80
HSBC Holdings plc has just reported for 2017 a(n) revenue per share of 18.60, earnings per share of 4.67, and a cash flow per share of 3.11. The yield on the 20-year U.K treasury bonds and the 20-year average return on FTSE 100 are 3.3 percent and 12.5 percent respectively.
a)Is the stock of HSBC Holdings plc fairly valued? (Prove your answer numerically showing all your computations.)
b)Is the dividend discounting model the right valuation method for HSBC Holdings plc? Explain.
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Foundations of Financial Management
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen
16th edition
125927716X, 978-1259687969, 1259687961, 978-1259277160
