Financial Management FINA310-1205B-01

Financial Management FINA310-1205B-01

Stock Pricing (CAPM & CGM model)

Question 1

The CAPM (Capital Asset Pricing Model) is a financial model developed in the sixties of the last century and linking, linearly, the profitability of any financial asset with the market risk of the asset. In a perfect market, characterized by the absence of taxes and other costs transactions, where there is perfect symmetry of information and unrestricted access to credit and on- all agents have rational expectations, there is no reason to exist rates differentiated interest. Under these conditions, the best investment is always the one offering the better rate of return. It turns out that in the real world markets are not perfect and agents are averse risk. This means that charge a premium to take a risk. We call risk an investment of uncertainty over his return. You see that for an investment is considered risky is not necessary that their expected results are not favorable, just to be uncertain.. Where:

R p - Is the rate of return on investment, also called the hurdle rate mini- ma

R m - Is the average market return

R f - Is the rate of return of a risk free investment

ß - is the beta and is defined as the riskiness of the asset.

Question

Find an Estimate Financial Calculation for the given Problem: Consider the 10 Year data of US treasury Bonds.

An analysis of the given website i.e. www.bloomberg.com, the risk-free rate for Interest (krf) is calculates as (3.06).

Concluding the information of XYZ Stock we have to found out the following values?

Data:

Beta of Stock (ß) = 1.64

Annual Dividend = $ 0.8

Growth Rate of 3 Year = 8.2%

P/E Ratio of Industry = 23.2

EPS of Stock = $4.87

Calculation

Formula: KA = KRF + ß (kM - kRF)

Ks = 3.06 + 1.64 (9)

Ks = 17.82%

CGM Model

Formula: Po = D1/ks - g

The Annual Current Dividend (Do) is $0.8

The growth rate is 8.2%

Expected stock dividend (D1) = $0.8 * 1.082 = $0.8656

Po = $0.8656/0.1782 - 0.082 0.0962

Po = $8.993

Question

Answer

Ks = 3.06 + 1.64(12)

Ks = 22.74

Question

Data

EPS of XYZ Stock = $4.87

P/E Ratio of the Industry = 23.2

Price of Stock = (EPS) (P/E Ratio)

Calculation

= $4.87* 23.2 = $112.98.

The model which is based on the future expectations is termed as price earning model. It helps in reflecting the investors towards the company i.e. an investor can expect about the Dividends.

Conclusion

The CAPM (Capital Asset Pricing Model) is a financial model developed in the sixties of the last century and linking, linearly, the profitability of any financial asset with the market risk of the asset.

Assignment # 2 Unit 3 Individual Project

Assignment # 2 Unit 3 Individual Project

Introduction

Global Operation Management

International markets have been a challenge for the companies. The growing pressure on the domestic market resulting increase in tariffs, while Imports are decreasing which also hinders the foreign investors and their participation in regional economies. Therefore, it becomes a mandatory practice for the companies to manage their operation ...