ch05boc-model - A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17...

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1 of 2 Worksheet for Chapter 5 BOC Questions 2/3/03 We like to go through an Excel exercise both to get students more familiar with Excel and also because Exxcel is useful for showing sensitivity analysis. Questions 1 and 2. Data for Different Scenarios: Good Base Bad $1.00 $1.00 $1.00 These inputs are growth rate 8.0% 6.0% 4.0% arbitrary but 2.0% 3.0% 4.0% "reasonable" in that Inflation premium 2.0% 4.0% 6.0% such conditions do at 9.0% 11.0% 16.0% times exist. beta 0.90 1.1 1.20 4.0% 7.0% 10.0% Market risk premium (MRP) 5.0% 4.0% 6.0% $1.08 $1.06 $1.04 8.5% 11.4% 17.2% Price, constant g = $216.00 $19.63 $7.88 This example demonstrates that stock prices can experience huge changes as a result of changes in the basic parameters. Note too that the stock price gets extremely high if g approaches r. For example, if we changed g in the good scenario from 8% to 8.4%, the price would "explode" to $1,080. One must be very careful when using the constant growth model to avoid getting nonsense results. If one is not
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ch05boc-model - A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17...

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