Cfc session 6 ch6 7

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Unformatted text preview: Value Line, Ibbotson Associates, etc. • Adjusted Beta Beta • Betas have a tendency to revert to the mean of 1.0 • Can utilize combination of recent beta and mean • 2.22 (0.7) + 1.00 (0.3) = 1.554 + 0.300 = 1.854 estimate 102 Certified Financial Controller CFC 51 Determination of the Required Rate of Return Li Mill Lisa Miller at Basket Wonders is attempting to determine the rate of return required by their stock investors. Lisa is using a 6% Rf and a long-term market expected rate of return of 10%. A stock analyst following the 10% firm has calculated that the firm beta is 1.2. What is the required rate of return on the required stock of Basket Wonders? 103 Certified Financial Controller CFC BWs Required Rate of Return RBW = Rf + βj(RM – Rf) RBW = 6% + 1.2(10% – 6%) 10% 10. RBW = 10.8% The required rate of return exceeds the market rate of return as BW’s beta exceeds the market beta (1.0). 104 Certified Financial Controller CFC 52 Determination of the Intrinsic Value of BW Lisa Miller at BW is also attempting to Lisa Miller at BW is also attempting to determine the intrinsic value of the stock. She is using the constant growth model. Lisa estimates that the dividend next period will be $0.50 and that BW will grow at a constant rate of 5.8%. The stock is currently selling for $15. What is the intrinsic value of the stock? Is the stock over or underpriced underpriced? 105 Certified Financial Controller CFC Determination of the Intrinsic Value of BW = $0.50 10. 10.8% – 5.8% = Intrinsic Value $10 The stock is OVERVALUED as the market price ($15) exceeds the intrinsic value ($10 $10). 106 Certified Financial Controller CFC 53 Security Market Line Required Return (Underpriced) Stock X (Underpriced) Direction of Movement Rf Direction of Movement Stock Y (Overpriced) Systematic Risk (Beta) 107 Certified Financial Controller CFC Determination of the Required Rate of Return Small-firm Effect Effect Price/Earnings Effect January Effect These anomalies have presented serious challenges to the CAPM theory. 108 Certified Financial Controller CFC 54...
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This note was uploaded on 05/28/2013 for the course FINANCE economy taught by Professor Nill during the Fall '12 term at Bronx School Of Law And Finance.

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