FIN 3312
STOCK VALUATION PROJECT
GOAL: To determine the theoretical value of
your firm’s stock using the non-constant dividend valuation model and contrast
to actual market value.
STEP
1: Determine the required return for your stock using the
CAPM, which means determining the risk-free rate, the market return, and your
firm’s beta.
Risk-free rate: Use the quoted yield on the 10-year U.S. Treasury Bond. It will likely be around 2.3% (the quote is
in percent, even though there is no percentage sign)
Market Risk Premium: Since
it’s too hard to forecast the market, let’s use a market risk premium of 7%
Beta: Available online from most financial web
sites, including Yahoo Finance and
NASDAQ.com under “Summary Quotes”.
STEP 2: Determine the
theoretical price of your stock.
Last Dividend: Find the most recently paid dividend for your stock. If your firm does not pay dividends, simply
substitute earnings per share for dividends per share. Dividend (and EPS) info can be found on
Yahoo! Finance on the main company page.
Dividend Growth Rate: Growth rates are available as the long-term growth rate estimate
available from Yahoo!, under Analyst Estimates—use the “Next 5 Years” growth
rate at the bottom of the page for the next five years and then a rate of 3% as
the long-term constant growth rate.
Note: if your required return is
less than 3%, you will need to use a lower long-term constant growth rate. You must have a long-term growth rate that is
less than your required return.
Use the
5-year growth rate to determine D1 through D5, then the
long-term constant rate to determine P5.
Then find
the NPV of the dividends and future price to determine the theoretical price of
your stock, P0.
STEP
3: Find the actual market price, which can be found on any
finance web site, and place it next to your computed price…appropriately
labeled.
Submitting
Assignment: Submit this project online again. Just submit one project for the entire group
to the TRACS Assignment site. Make sure
everyone’s name is on the project. You
can do it either in Word or Excel. Paste
the link to the Yahoo! pages for the dividend info and growth rate. The rest will just be the calculations.
