As a manager, it is important to understand how decisions can be analyzed in terms of alternative courses of action and their likely impact on a...

As a manager, it is important to understand how decisions can be analyzed in terms of alternative courses of action and their likely impact on a firm's value. Thus, it is necessary to know how stock prices can be estimated before attempting to measure how a particular decision might affect a firm's market value.

To prepare for this Assignment, choose a publicly-traded company, and then estimate your company's common stock price, using one of the valuation models presented in the assigned readings or outside readings. (If you want to analyze a dividend paying company, you can find a robust list athttp://www.dividenddetective.com/big_dividend_list.htm.)

In addition, here is a template you will find to be useful for the assignment. It matches the examples given in the textbook on stock valuation models in Chapter 9:

Stock Models (Excel workbook)

Defend your choice of model, and explain why it is appropriate to use for your company's stock. Be sure to explain how you arrived at any assumptions regarding values used in the model. Determine whether your company appears to be correctly valued, overvalued, or undervalued based on your company's stock current price and model result. Check Yahoo Finance for current stock prices. Finally, explain why your company's stock appears to be over-, under-, or correctly valued.

To help you with this assignment, please review the following documents:

Week 4 Application Instructions

I will like to choose Walmart or Apple.inc

• a) Calculate the required rate of return (r) for the stock using the Capital Asset Pricing Model (CAPM).

r = (10-year Treasury Bond Yield) + [Beta (S&P 500 Index Return - 10-year Treasury Bond Yield)]

Search for 10-year Treasury Bond Yield using the Search box at finance.yahoo.com.

S&P 500 Index Return for 2014 can be obtained at google.com.  Since the return for 2015 was negative, we can use the 2014 value of 11.39%.

Plug in the data and calculate the required rate of return using the value for beta.

b) The constant growth rate of dividends, g = retention ratio x ROE

= (1 – payout ratio) x ROE

= [1 – (dividend per share/EPS)] x ROE.

g will be a percentage.  Convert to a decimal by dividing by 100.

c) Intrinsic value of stock = Po = [Do (1 + g)]/(r – g)

Do is the dividend just paid while D1 = Do (1 + g) is the dividend to be paid.