Case study 4
Gloria
the Investor
Gloria
is a seasoned sales manager with a very large international company. Although she has a great deal of experience
with sales, she has little experience with investing. Gloria has been investing
in her company’s 401K plan. However she has decided to invest some extra money
on her own. Gloria has $75,000 she would like to invest.
Since
she has recently signed up for internet access to a broker, she is allowed a
small number of phone calls to a broker at no additional charge to her.
She
calls ABC investments and talks with a Mr. Bill. She tells Mr. Bill she would
like to invest in undervalued stocks and can he recommend about ten stocks for
her to research. Mr. Bill tells Gloria his company has about 15 stocks they
believe are undervalued and will outperform the marker over time. Mr. Bill gave
her the company web site where she can down load that list of stocks.
Below is
a list of those stocks:
|
rating |
Stock Price |
Total 2003 Dividends |
5 year total dividend growth |
Beta |
|||
|
1 |
$12.05 |
$0.95 |
0.65% |
0.65 |
|||
|
2 |
$28.02 |
$0.00 |
-100.00% |
2.3 |
|||
|
3 |
$17.75 |
$0.00 |
0.00% |
1.89 |
|||
|
4 |
$15.43 |
$1.30 |
6.23% |
1.2 |
|||
|
5 |
$63.79 |
$0.75 |
0.95% |
1.35 |
|||
|
6 |
$71.11 |
$6.00 |
5.00% |
.67 |
|||
|
7 |
$10.00 |
$0.00 |
0.00% |
1.78 |
|||
|
8 |
$49.51 |
$0.68 |
0.75% |
0.95 |
|||
|
9 |
$45.00 |
$5.00 |
0.38% |
0.92 |
|||
|
10 |
$39.78 |
$0.00 |
-90.00% |
1.5 |
|||
|
11 |
$29.75 |
$2.00 |
2.25% |
0.85 |
|||
|
12 |
$73.09 |
$0.00 |
-1.00% |
0.38 |
|||
|
13 |
$20.39 |
$6.00 |
5.25% |
0.71 |
|||
|
14 |
$18.25 |
$1.00 |
8.00% |
1 |
|||
|
15 |
$7.00 |
$1.35 |
8.85% |
0.73 |
|||
|
Treasury Bond Rate |
4.30% |
||||||
|
Return on the Broad Market |
11.90% |
Answer
the below questions
1.
Calculate
the required rate of return using the Capital Asset Pricing Model (CAPM).
2.
Using
the constant growth formula (also known as Gordon Growth Model), calculate the
intrinsic value of each stock.
3.
Compare
the values you calculated in questions 1 & 2. Do the values closely
approximate the stocks market price? If not why not?
4.
What
do your results mean for Gloria?
5.
How
does your result affect the “market efficiency”
theory.
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