BCO224 Financial Markets Midterm Makeup
Task
- individual
- answer the questions below
- submission format: pdf or ms word
Formalities:
- Wordcount: no more than 1000-1800 words
- Cover, Table of Contents, References and Appendix are excluded of the total wordcount.
- Font: Arial 12,5 pts.
- Text alignment: Justified.
- The in-text References and the Bibliography have to be in Harvard’s citation style.
Submission:
Weight:
It assesses the following learning outcomes:
- Outcome 1: To be able to price stocks
- Outcome 2: Have general understanding of what happens in the markets recently
- Outcome 3: To be able to apply dividend growth model
Question 1: Dividend growth model [40 points]
- Computer stocks currently provide an expected rate of return of 18%. M., a large computer company will pay a year-end dividend of $2 per share. If the stock is selling at $50, what must be the market’s expectation of the growth rate of M’s dividends?
- If dividend growth forecasts for M are revised downward to 5% per year, what will happen to the price of M’s shares? What (qualitatively) will happen to the company’s price to earnings ratio?
Question 2: Valuation ratios [40 points]
- Research is starting coverage of a mature manufacturing industry. The head of the research department, gathered the following fundamental industry and market data to help in his analysis:
Forecast industry retention rate: 42%
Forecast industry return on equity: 26%
Industry beta: 2
Government bond yield: 6%
Equity risk premium: 5%
Compute the price to earnings ratio for the industry based on this fundamental data.
Question 3: Stock valuation [20 points]
An analyst has been asked to use a multi-stage dividend discount model to determine the value of H. shares.
- The forecast of dividends for the next 4 periods are, respectively: $0.8, $0.85, $0.9, and $1.05. However, this growth rate cannot be sustained indefinitely.
- After the 4th year, there is a steady state growth of dividends which is forecasted as follows. The forecast dividend payout ratio is 25% with a return on equity of 10%.
- For the required rate of return, we estimate that the risk-free rate is 2%, the beta of this stock is 0.95 and the market risk premium is 8%.
Find today’s estimate of the intrinsic value of H. shares.
Rubrics
Rubrics
| Descriptor | |
| 9-10 | The student demonstrates an excellent understanding of the concepts. |
| 8-8.9 | The student demonstrates a good understanding of the concepts. |
| 7-7.9 | The student demonstrates a fair understanding of the concepts. |
| 6-6.9 | The student demonstrates some, but insufficient understanding of the concepts. |
| 3-5.9 | The student demonstrates insufficient understanding of the concepts. They may mention some relevant ideas or concepts, although it is clear that the relationship between them is not understood by the student. |
| 1-2.9 | The student demonstrates insufficient understanding of the concepts and does not mention any relevant ideas or concepts. |
| 0 | The student leaves the question blank or cheats. |
Points are stated at the end of each question.
