Discount Rate & Q2 Valuation of a Stock
Q1 Discount Rate & Q2 Valuation of a Stock
The following videos provide an overview of the paper. Make sure you use your own words and data throughout. Also, understand that these videos are only an overview of the paper. Your actual paper should be in a professional paper format with much more discussion of your rationale for each assumption. If your wording exactly or very closely matches that of the professor’s, you will get zero credit for that portion of the paper. Use your own words, thoughts and beliefs! Also, do not select Walmart as your company since that is the company used in the example.
Q1 : Determine the discount rate (ke)
- Select a company that is currently paying dividends and has positive earnings per share
- Using CAP-M (Ke = Rf + MRP * Beta), determine the discount rate for your stock
- Risk free rate
- Current ten-year Treasury yield, or
- Normalized approach
- Risk free rate
- This article may help you decide: http://aswathdamodaran.blogspot.com/2011/09/risk-free-rates-and-value-dealing-with.html
- Be sure to fully justify your rate and why you selected the approach you did
- Market Risk Premium: recommend using
- Use class discussions and any additional research you choose to do to determine your MRP
- Be sure to fully justify your MRP
- Beta: Determine beta using approach presented in class, discussing your stock’s
- Revenue sensitivity
- Financial leverage (include use of Excel file provided in class)
- Operating leverage (include use of Excel file provided in class)
- Historical rolling 3-year beta chart. The linkbelow provides instructions. Thesecond link is a web site that can help you check the reasonableness of your chart. All papers must create the rolling beta chart in Excel with the Excel chart pasted into the paper.
- Put all of the above together, discussing your rationale for each, to determine the discount rate (ke) for your stock using CAP-M
Question 2: Value the stock
- Using your ke from Paper 3, determine a value for your stockusing all the three valuation models listed below
- Use the Gordon Growth Model (Value = Div1 / (ke – g) or Value = Div0 * (1 + g) / (ke – g)
- Justify your growth rate
- Remember the benchmark for growth of overall US economic growth
- Remember: Growth cannot be greater than yourke
- Use the Capitalized Earnings Model (Value = EPS1 / (ke – inflation) or Value = EPS0 * (1 + inflation) / (ke – inflation)
- Recommend using 2 or 2.5% for inflation
- Use H Model (Value = [Div0 * (1 + g) + Div0 * H * (gST – gLT)] / (ke – gLT)
- Justify your two growth rates and your H
- All justifications can be high level but you need to have some rational. See class discussion on determining growth rates and other assumptions.
- Once you get your valuations, compare them to the current stock price and make a Buy or Sell recommendation.