Stock Valuation and CAPM
Compute the intrinsic value of the two stocks analyzed for the Module 6 Critical Thinking assignment and compare the values to the reported market stock price in order to determine if the price is right.
You should do the following:
- Compute beta of each stock using regression analysis. Use ordinary least squares regression with the market index return as the independent variable and the individual stock return as the dependent variable. Use data from 1/1/2000 – 1/1/2017.
- Compute each stock’s required rate of return using the Capital Asset Pricing Model (CAPM) and beta from above.
- Compute the intrinsic stock price using the Gordon Growth Model and the required rate of return.
- Discuss whether the stocks are undervalued or overpriced.
- Discuss the models used and their limitations, if any.
- What are analysts’ opinions of the firm’s stock value?
- Discuss the discrepancies between the computed and actual stock prices.
- What are the assumptions of capital market theory?
- What is a completely diversified portfolio?
- How many stocks are usually needed to get a completed diversified portfolio?
- How does systematic risk compare to unsystematic risk?
- Compare and contrast the Capital Market Line with the Security Market Line.
- How does fundamental analysis compare to technical analysis?
- There are some studies that suggest that there are other factors besides beta that should be used to estimate expected returns. Name and describe some of these other factors.
Conclude the project by making recommendations based on your findings. Does it make economic sense to purchase the stocks given the intrinsic values, financial health of the companies, and the industry outlook? You must use logic and objective argument to support your decision. Be sure to comment or discuss limitations of your recommendation, if any.
Your paper should meet the following requirements:
- Be well written
- Be 10 to 12 pages in length for the analysis and explanations (this does not include the cover page, reference page, or appendices)
- Be formatted according to the CSU-Global Guide to Writing and APA
- Include Excel spreadsheet with all computations; this spreadsheet should be embedded in the Word document as an appendix after your analysis and explanations
- Include a minimum of five credible references
Your reference page should be formatted according to the CSU-Global Guide to Writing and APA. All sources listed on the reference page must also be cited in the paper.
Appendix 1: Charts and Graphs
Appendix 1 should contain all charts and graphs except those included in the body of the analysis and explanations above. Be sure to properly label the charts and graphs.
Appendix 2: Quantitative Analysis Calculations
Appendix 2 should contain all quantitative analysis calculations that are properly labeled. Embed all spreadsheets in the Word document.