WEEK 4 DISCUSSIONS Discussion 1: Risk and Return A. Assume that you own a sizeable investment portfolio that is invested exclusively in a broad-based stock market index fund. Assume also that you contemplate adding a sizeable investment in the stock of the company that you have elected to use for Assignment 1 (which is due at the end of Week 10). What will happen to the overall riskiness of the portfolio, and why, with the addition of the new investment? What specific indicators support your conclusion? Should you make the additional investment ? why or why not? I used NIKE INC from Assignment 1. . B. Using the company that you have selected for Assignment No. 1 Financial Research Project (due at the end of Week 9), value a share of the company?s stock using both the (1) constant growth dividend discount model, and (2) a discounted free cash flow model, and compare those values to the current trading price of a share of the stock? Is the stock undervalued or overvalued? Carefully explain the assumptions used in the valuations and the rationale for your response? An Excel-based Dividend Discount Model is provided if you want to use it (see attached file). You may use http://www.valuepro.net for the discounted free cash flow valuation model.) Alternatively, you may use the Excel-based Discounted Cash Flow Valuation Model (file attached). Make sure that the presentations discuss the assumptions used in the valuations and present the results of the valuations with comparisons to the existing stock price. Note: See the attached for information about ValuePro.net and for an Excel Dividend Discount Model template. 1 Using ValuePro Online Valuation Model 1014.docx 2 DDM Stock Valuation Models 1014.xls 3 Discussion DDM Excel Model 1014.docx 4 DFCF Valuation Model 0714.xls
WEEK 4 DISCUSSIONS Discussion 1: Risk and Return A. Assume that you own a sizeable investment portfolio that is invested exclusively in a broadbased stock market index fund. Assume also that you contemplate adding a sizeable investment in the stock of the company that you have elected to use for Assignment 1 (which is due at the end of Week 10). What will happen to the overall riskiness of the portfolio, and why, with the addition of the new investment? What specific indicators support your conclusion? Should you make the additional investment - why or why not? NIKE INC. is what I chose from Assignment 1. . B. Using the company that you have selected for Assignment No. 1 Financial Research Project (due at the end of Week 9), value a share of the company's stock using both the (1) constant growth dividend discount model, and (2) a discounted free cash flow model, and compare those values to the current trading price of a share of the stock? Is the stock undervalued or overvalued? Carefully explain the assumptions used in the valuations and the rationale for your response? An Excel-based Dividend Discount Model is provided if you want to use it (see attached file). You may use http://www.valuepro.net for the discounted free cash flow valuation model.) Alternatively, you may use the Excel-based Discounted Cash Flow Valuation Model (file attached). Make sure that the presentations discuss the assumptions used in the valuations and present the results of the valuations with comparisons to the existing stock price. Note: See the attached for information about ValuePro.net and for an Excel Dividend Discount Model template. 1 Using ValuePro Online Valuation Model 1014.docx 2 DDM Stock Valuation Models 1014.xls 3 Discussion DDM Excel Model 1014.docx 4 DFCF Valuation Model 0714.xls STOCK VALUATION MODELS - DDM (Dividends & Repurchases) NAME OF COMPANY Sample Company ENTER DATA IN YELLOW-CODED CELLS OUTPUT IN SUBSEQUENT WORKSHEETS LAST YEAR 2014 Year NUMBER OF SHARES OUTSTANDING (Mil.) 906.00 Millions of Shares MARKET PRICE OF STOCK / SHARE $93.45 Dollars Per Share All Data NET INCOME AFTER TAXES $7,237.00 Millions of Dollars Required TOTAL SALES $162,558.00 Millions of Dollars BOOK VALUE OF EQUITY $27,537.00 Millions of Dollars RISK FREE RATE (Appropriate T Bill or TBond) 4.92% Annual Percentage Rate DIVIDENDS PAID (TOTAL) $2,290.00 Millions of Dollars STOCK REPURCHASES (TOTAL) $371.00 Millions of Dollars REQUIRED INFORMATION FOR CALCULATION OF REQUIRED RATE OF RETURN BETA OF STOCK 0.84 Required MARKET RISK PREMIUM 1.00% Expected Market Risk Premium % Data REQUIRED INFORMATION FOR VARIABLE GROWTH RATE VALUATIONS EXPECTED GROWTH RATE FOR EARNINGS Must be positive 7.0000% 6.0000% 5.0000% 5.0000% 5.0000% values in each EXPECTED GROWTH RATE (DIVIDENDS & 5.0000% 5.0000% 5.0000% 5.0000% 5.0000% cell STOCK REPURCHASES) COMPUTER-GENERATED CALCULATIONS EARNINGS PER SHARE $7.99 LAST CASH DIVIDEND & STOCK $2.94 REPURCHASE PAYMENT PER SHARE EXPECTED ANNUAL GROWTH RATE FOR 5.55% Geometric Mean of Annual Rates EARNINGS EXPECTED ANNUAL GROWTH RATE 5.00% Geometric Mean of Annual Rates (DIVIDENDS & STOCK REPURCHASES) REQUIRED RATE OF RETURN (k) 5.76% CAPM REQUIRED RATE OF RETURN (k) Dividend Discount Model 8.30% REQUIRED RATE OF RETURN (k) Average of CAPM and Dividend Discount Model 7.03% EXPECTED EARNINGS PER SHARE IN 5 $10.49 YEARS SUSTAINABLE RATE OF GROWTH 16.62% (ROE * (1-Payout Ratio)) COMPUTER-GENERATED CALCULATIONS STOCK VALUE - ZERO GROWTH MODEL $41.78 Not applicable for most stocks STOCK VALUE - CONSTANT GROWTH MODEL $151.91 STOCK VALUE - VARIABLE GROWTH MODEL $151.91 EXPECTED RETURN COMMON STOCK INPUTS FORMULA k = ( D1 / P0 ) + g LAST DIVIDEND & STOCK REPURCHASE PER SHARE PRICE OF STOCK EXPECTED GROWTH RATE (DIVIDENDS & STOCK REPURCHASES) OUTPUT ESTIMATED REQUIRED RATE OF RETURN (k) 8.30% $2.94 $93.45 5.00% PRICE OF COMMON STOCK - ZERO GROWTH MODEL INPUTS LAST DIVIDEND & STOCK REPURCHASE PER SHARE REQUIRED RATE OF RETURN (ROR) (Average of CAPM and Dividend Discount Model) OUTPUT PRICE OF STOCK $41.78 FORMULA $2.94 7.03% P0 = D0 / k PRICE OF COMMON STOCK - CONSTANT GROWTH MODEL INPUTS FORMULA P0 = D1 / ( k - g ) LAST CASH/STOCK REPURCHASE PAYMENT PER SHARE REQUIRED RATE OF RETURN (ROR) EXPECTED ANNUAL GROWTH RATE k must > g (Dividends + Stock Repurchases) OUTPUT PRICE OF STOCK $2.94 7.03% 5.00% $151.91 PRICE OF STOCK - VARIABLE GROWTH MODEL INPUTS LAST YEAR (e.g., 1996) LAST CASH & STOCK REPURCHASE PAYMENT PER SHARE EXPECTED ANNUAL GROWTH RATE (DIVIDENDS + STOCK REPURCHASES) REQUIRED RATE OF RETURN (ROR or k) 2014 2015 2016 2017 2018 2019 5.00% 5.00% 5.00% 5.00% 5.00% $2.94 7.03% FORMULA P0 = Present Value of Dividends Plus Present Value of Future Stock Price OUTPUT 2015 $3.08 NON-DISCOUNTED CASH FLOWS PRESENT VALUE $151.91 2016 $3.24 2017 $3.40 2018 $3.57 $184.65 $3.08 DIVIDENDS FUTURE PRICE $3.24 $3.40 $188.22 2019 $3.75 PRICE OF STOCK - DIVIDEND AND EARNINGS APPROACH INPUTS PRESENT STOCK PRICE LAST CASH & STOCK REPURCHASE PAYMENT PER SHARE EXPECTED ANNUAL GROWTH RATE (DIVIDENDS & STOCK REPURCHASES) ESTIMATED STOCK PRICE REQUIRED RATE OF RETURN (ROR) $93.45 $2.94 5.00% $0.00 7.03% For 5 Years In 5 Years FORMULA P0 = Present Value of Dividends Plus Present Value of Future Stock Price OUTPUT 2014 $3.08 2015 $3.24 2016 $3.40 2017 $3.57 $2.88 $2.83 $2.77 $2.72 PRICE OF STOCK $13.87 2018 $3.75 $0.00 $2.67 CASH + STOCK REPURCHASE PMT PER SHARE FUTURE VALUE OF STOCK PRESENT VALUES
