riskcase - 2 Risk and Return Peachtree Securities, Inc. (A)...

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1 2 Risk and Return Peachtree Securities, Inc. (A) Peachtree Securities is a regional brokerage house based in Atlanta. Although the firm is only 20 years old, it has prospered by following a simple goal – providing quality personal brokerage services to small investors. Jake Taylor, the firm’s founder and president, is well-satisfied with Peachtree’s progress. However, he is apprehensive about the future, as more and more of the firm’s customers are buying mutual funds rather than individual stocks and bonds. Thus, even though the number of customers per office has been increasing because of population growth, the number of transactions per customer has been decreasing, and hence sales growth has slackened. Taylor believes this trend will continue, so he has been actively expanding his product line in an effort to increase sales volume. As a first step, Peachtree began offering trust and portfolio management services five years ago. Many of the trust clients are retirees who are interested primarily in current income rather than capital gains. Thus, an average portfolio consists mostly of bonds and high yield stocks. The stock component is heavily weighted with electric utilities, an industry that has traditionally paid high dividends. For example, the average electric company’s dividend yield was about 6.3 percent in 1992, versus an average stock’s yield of 3.1 percent. Until 1993, Peachtree had no in-house security analysts –all stock and bond selections were based on research provided by subscription services. However, these services had become very costly, and the volume of portfolio management had reached the point where hiring an in-house analyst was now cost-effective. Because most of its portfolios were heavily weighted with electric utilities, Peachtree created its first analyst position to track this industry. Taylor hired Laura Donahue, a recent graduate of the University of Georgia, to fill the job. Donahue reported to work in early January, 1993, jubilant at having the opportunity to use the skills she had worked so hard to learn. Taylor then informed her that her first task would be to conduct a seminar for a group of Peachtree customers on stock investments, including the effects of different securities on portfolio performance. Donahue was asked to pick an electric utility, assess its riskiness, develop an estimate of its required rate of return on equity, and then present her findings to a group of Peachtree’s customers. Donahue’s first step –choosing the company- was simple. She had been born and raised in Tampa, Florida, so she picked TECO Energy, Inc., the holding company for Tampa Electric. Next, she searched for information on the company. Donahue remembered using the Value Line Investment Survey during her student days, so she turned to this
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2 source first. (See Figure 1 on the last page of this case.) Then, she spent a few days reviewing industry trends to gain a historical perspective.
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This note was uploaded on 07/09/2011 for the course FIN 4504 taught by Professor Banko during the Summer '08 term at University of Florida.

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riskcase - 2 Risk and Return Peachtree Securities, Inc. (A)...

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