Methodology

Potential investments were identified through a value-based screen which included

criteria from Table 1. Price-to-earnings ratio was excluded from our analysis because
of the inherent pitfalls in this metric, as discussed by Bodie, Kane, and Miller (2012).

From here, companies were evaluated based on a history of dividend payments,

whether there were any net losses reported over the past 5 years, and on their
growth rates, calculated based on 3-year average values for earnings at the
beginning and end of a 5-year period.
Five-year monthly return data for potential investment and the SPDR SP500 ETF
(SPY) was collected from Yahoo Finance (finance.yahoo.com). The monthly holding
period return (HPR) was calculated for each stock and the S&P500 Index. To obtain
the excess return of each investment and the index for each month, the annualized
risk-free rate was converted to a monthly risk-free rate was subtracted from the
returns. One-month treasury bill rates were obtained from Federal Reserve Historical
Data (http://www.federalreserve.gov/releases/h15/data.htm). The excess returns on
the individual stocks chosen were regressed on the excess returns of the market,
which yielded the 5-year historical values for beta and alpha.
Stocks with nonzero alphas analyzed with the dividend discount method. Analysis
using the free cash flow to equity method and constant gowth DDM proved
cumbersome and therefore results from these method were not used. A value of
alpha was forecasted for each investment by subtracting the return predicted by the
Capital Asset Pricing Model (CAPM) from the return as predicted by the dividend
discount model. The equity risk premium was also calculated using the DDM based
on the future period dividend, current stock price, and expected growth rate of
dividends for each stock.
Fundamental analysis was performed using data from 10-K reports obtained from
the EDGAR database. The price to book ratio was calculated as the ratio of total
equity minus intangible assets and goodwill to total shares outstanding.

Twice as much cash as federal government, , though their current ratio and ratio of
long-term debt to working capital falls below that of Google, a direct competitor.
These results dont agree with the traditional price to book metric, which we
calculated as 6.32, higher than that of Google (2.73).

FIN525 - Core-Satellite Portfolio Project Draft

Fellas, we will have our real time communication here in this document as a supplement of
Facebook group.

For Toyota Motor Corp., Dividend Yield (D0) = 2.62% for Dec. 3, 2015
(https://ycharts.com/companies/TM/dividend_yield ),
Stock price today (P0) = 124.72 (http://finance.yahoo.com/q/hp?
s=TM&a=10&b=1&c=2010&d=11&e=30&f=2015&g=m

Form 20-F has total equity!!! http://www.sec.gov/cgi-bin/viewer?

action=view&cik=1094517&accession_number=0001193125-15232464&xbrl_type=v

While ROE = 14.35%, payout ratio = 16.55%, g = ROE * (1 - payout ratio) = 11.98%
Dividends paid in 2014 are 1.9556 +1.2632 = 3.2188. Multiplied by growth rate, D1
= 3.2188 * 1.1198 = 3.6043.
(Data of ratios gathered from http://finance.yahoo.com/q/ks?s=TM)
So, E(R) = D1/P0 + g = 8.50%.

The CEO of Vanguard said the Market will return about 7% over the next 10 years:
www.youtube.com/watch?v=fD8jO1FgSoU
Therefore we should use 7% as the E(Rm)
THE EQUITY RISK PREMIUM WILL BE ESTIMATED AS 7%-0.5%=6.5%

ERP=6.5%

Shares outstanding: http://www.sec.gov/edgar/searchedgar/companysearch.html

Search ticker symbol.

Models to value the stock:

Intrinsic value: CANT USE.

Problem is that we need to have an estimate for the price of the stock one year from
today.

Dividend Discount Model: Stock price = present value of sum of all dividends. Useless
because it requires dividend forecasts for every year into the indefinite future. Use
contant growth model instead:

Constant growth dividend discount model AKA Gordon Model: Stock price = D1/(k-g)
k= Rf + beta x (Equity risk Premium) = 4%(????) + beta x (6.5%)

Discounted Cash Flow Formula: E(r) = D1/P0 + g

Stock price = E1(payout ratio)/[k - ROE x (1-payout ratio)]

E1= earnings
k= Rf + beta x (Equity risk Premium) = 4%(????) + beta x (6.5%)

Summary page should provide a discussion of the PITFALLS and PROBLEMS

with the models from CHAPTER 18 of BKM.