04 May DO THESE MEASURES OF RISK AGREE WITH THE BETA OF THE STOCK?
You are working as a financial analyst for a large brokerage firm and have been asked by one of your clients to research four stocks for him. Using ValueLine (library database) as well as Internet resources such as Morningstar.com and Bloomberg.com and the companys own websites, prepare a report for the client regarding the eight stocks that you researched. Be sure to include the following in your report (be sure to select stocks that have at least five years of data):
1) A brief summary of the nature of each firms business.
2) An analysis of the financial statements of the companies using ratio analysis including current ratio, average collection period, total asset turnover, return on sales, return on assets, return on equity, times interest earned and P/E ratio. Note that the analysis is more than providing the ratios…be sure to discuss what they mean. Note the ValueLine provides “industry peers” on the “quote lookup” page.
3) Calculate the growth rate of dividends using three years of history for each company. Also, use the CAPM to calculate the expected return (use the S&P 500 for the market return, the 10-year Treasury bond yield for the risk-free rate and the Beta provided by ValueLine). Use the Gordon model (constant growth model) to calculate the intrinsic value for each of the stocks.
4) Compare the calculated value for each of the stocks to the stock quotation on ValueLine and explain what the intrinsic value calculation tells you.
5) Use the P/E model to calculate the intrinsic value for each of the stocks (use the average P/E ratio for the peers from ValueLine and the EPS of each company increased by the growth rate of EPS).
6) Compare the P/E valuation to the quoted price and explain what it means.
7) Calculate the range of returns, standard deviation of returns and co-variation of returns for each of the four stocks (using five years of data) and explain your findings. Do these measures of risk agree with the Beta of the stock? Why or why not?
8) Provide a summary of findings for your client, including whether or not you would suggest buying the stocks and the reasoning behind these suggestions.
The completed report is due on the final day of class in hard copy, should not exceed 10 pages (not including cover page, references, appendices, etc.) and should be formatted in APA style with appropriate citations and references. Do not invest in fancy report covers; a simple staple in the upper left hand corner will suffice nicely. The stocks should be from NASDAQ. There must be 8 different companies and the evaluation of their stock. It is a simple task.
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