The Theory and Practice of Investment Management: Asset Allocation, Valuation, Portfolio Construction, and Strategies, Second Edition

QUESTIONS

1. Consider three companies, A, B, and C. Suppose that a common stock analyst estimates that the market risk premium is 5% and the risk-free rate is 4.63%. The analyst estimated the beta for each company to be as follows: Company A, 0.9; Company B, 1.0, and; Company C, 1.2. The analyst uses to CAPM to estimate the discount rate. The CAPM says that the expected return is equal to the risk-free rate plus the product of the market risk premium and the company’s beta. What is the estimated discount rate for each company?

2. Estimate the value of a share of stock for each of the following companies using the constant growth model and estimating the average annual growth rate of dividends from 20X1 through 20X6 as given below as the basis for estimated growth beyond 20X6:

3. Estimate the expected return for each of the following companies:

4. Consider Company RV that has projected earnings per share of $2.5 and a projected book value per share of $20. Determine the estimated value of this Company RV, based on a relative value using the price-earnings ratio and the market value to book value ratio. Use the average of the respective multiples of the following three comparables companies:

5. Why would an analyst use a multiphase dividend discount model?

6. Why might an analyst ...