QUESTION 1: Toll Brothers, Inc. (Ticker: TOL) designs, builds, markets and sells homes in luxury residential communities in the United States. Determine and fully justify the appropriate beta for TOL and apply that beta to determine TOL's equity discount rate using the Capital Asset Pricing Model (10 minutes) For stocks, your boss was using the forward curve for her risk-free rate, where the current 10-year forward 10-year treasury rate is 2.60%. She calculates expected nominal GDP growth as the sum of productivity growth of 2.1%, labor growth of 0.5% and inflation of 1.9%. For the market risk premium, she uses the implied approach, assuming a current dividend yield for stocks of 2.0% (TOL's dividend yield is currently 1.1%), plus an adjustment for the buyback yield of 1.5% (TOL's buyback yield is 2.0%) and nominal corporate earnings growth of 4.5% (in line with the overall economy). Here is information on TOL's debt to equity and net margin standard deviations relative to stocks in the S&P 500, and a graph of TOL's rolling 3-year beta using monthly adjusted closing prices: TOL 77.55 Rank 53.3% Debt to Equity (%) Median 90 Precentile 10th Percentile S&P 500 71.88 259.61 11.26 S&P 500 TOL Rank 70.1% 12.53 Net Margin Standard Deviation (%) Median 90 Precentile 10th Percentile 6.25 117.76 1.69 TOL 3-Year Rolling Beta 4.00 3.50 3.00 M 2.50 2.00 1.50 1.00 0.50 2003 2001 2000 1968 1996 1994 1993 2015 2014 2012 2010 1989 1661 5007 2002 2008 2019 2017 Rolling Beta Median 10th Percentile 90th Percentile QUESTION 1: Toll Brothers, Inc. (Ticker: TOL) designs, builds, markets and sells homes in luxury residential communities in the United States. Determine and fully justify the appropriate beta for TOL and apply that beta to determine TOL's equity discount rate using the Capital Asset Pricing Model (10 minutes) For stocks, your boss was using the forward curve for her risk-free rate, where the current 10-year forward 10-year treasury rate is 2.60%. She calculates expected nominal GDP growth as the sum of productivity growth of 2.1%, labor growth of 0.5% and inflation of 1.9%. For the market risk premium, she uses the implied approach, assuming a current dividend yield for stocks of 2.0% (TOL's dividend yield is currently 1.1%), plus an adjustment for the buyback yield of 1.5% (TOL's buyback yield is 2.0%) and nominal corporate earnings growth of 4.5% (in line with the overall economy). Here is information on TOL's debt to equity and net margin standard deviations relative to stocks in the S&P 500, and a graph of TOL's rolling 3-year beta using monthly adjusted closing prices: TOL 77.55 Rank 53.3% Debt to Equity (%) Median 90 Precentile 10th Percentile S&P 500 71.88 259.61 11.26 S&P 500 TOL Rank 70.1% 12.53 Net Margin Standard Deviation (%) Median 90 Precentile 10th Percentile 6.25 117.76 1.69 TOL 3-Year Rolling Beta 4.00 3.50 3.00 M 2.50 2.00 1.50 1.00 0.50 2003 2001 2000 1968 1996 1994 1993 2015 2014 2012 2010 1989 1661 5007 2002 2008 2019 2017 Rolling Beta Median 10th Percentile 90th Percentile
