TemasekPolytechnic SchoolofInformatics&IT FIES AY2011/2012OctSemester Topic3(EquitySecuritiesRevaluation)Tutorial

1. Describe the Top-Down approach to security valuation. What are its advantages? 2. What is the basis to using the Dividend Discount Model to value equities? 3. What would an investor be willing to pay for a preferred stock that paid an annual $7 dividend if the yield on preferred was 25 basis points below a bond yield of 8%? 4. A stock is paid a $2 dividend last year. It is projected that next years dividend will be 5% higher and that it will sell for $40 at year end. If the required rate of return is 15%, what is the value of the stock? 5. A stock will pay a $2 dividend next year, $2.25 the year after and $2.50 the following year. An investor believes she can sell the stock for $50 at the end of a three year holding period. Required rate of return of the stock is 13%. What is the value of the stock? 6. What is the intrinsic value of a companys stock if next years expected dividend is projected to be 5% greater than todays $1 dividend? The sustainable growth rate is 5% and investors required rate of return is 10% for this stock. 7. A stock just paid a dividend of $1. The dividend for the next three years is expected to grow at a 30% rate after which the dividend in the fourth year and all future years is expected to grow at a rate of 4%. If the discount rate is 14%, what is the value of the stock? In addition, create a VBA Model that can calculate the value of a stock taking in user input of growth rates for supernormal and normal growth, period of supernormal growth and discount rate. Your VBA Model should not only output the value of the stock but list down the cash flows (dividend payouts) associated with the security. Example:

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8. What are the usefulness of P/E ratio? 9. What are the five stages of a business cycle? What are attractive investment opportunities during each cycle? 10. What are the five stages of an industry life cycle? 11. The three largest firms in a $200 billion industry have revenues of $50 billion, $30 billion, and $20 billion. Assuming the there are 10 other equal size firms in the industry, calculate the three firm concentration ratio and the Herfindahl index for the entire industry. 12. What are the different types of company stocks? 13. Which of the following is a correct prediction using the Herding concept in behavioural finance? (a) When Ali heard that many investors were selling their shares, he tried to buy more shares instead. (b) When Ali heard that many investors were selling their shares, he was indifferent to whether he wanted to buy or sell shares. (c) When Ali heard that many investors were selling their shares, he also tried to sell his shares. (d) None of the above. 14. Company XYZ stock has an estimated beta of 0.8. The equity market is expected to produce a return of 8.8% and risk free interest rate is 0.5%. What is the expected return on XYZ stock using the Beta Valuation Model for equity securities?

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