Dividend Valuation model
Stock value = Dividends/k
| Dividend valuation | Dividend | Rate | Value |
| IBM |
5.5 |
9% |
61.11111 |
| ORCL |
0.64 |
9% |
7.111111 |
| BAX |
0.505 |
9% |
5.611111 |
| BIG |
0.84 |
9% |
9.333333 |
| GE |
0.93 |
9% |
10.33333 |
Capital Asset Pricing Model
Ra =Rf + ᵝa(Rm - Rf)
| Company | Rf | ᵝa | RM | Rm -Rf | ᵝa(Rm - Rf) Ra | |||
| IBM |
0.0075 |
0.86 |
0.09 |
0.0825 |
0.07095 |
0.07845 |
||
| ORCL |
0.0075 |
1.1 |
0.09 |
0.0825 |
0.09075 |
0.09825 |
||
| BAX |
0.0075 |
0.75 |
0.09 |
0.0825 |
0.061875 |
0.069375 |
||
| BIG |
0.0075 |
1.04 |
0.09 |
0.0825 |
0.0858 |
0.0933 |
||
| GE |
0.0075 |
1.12 |
0.09 |
0.0825 |
0.0924 |
0.0999 |
||
Delegate your assignment to our experts and they will do the rest.
From stock valuation of the five selected companies, IBM is the highest with 61.11 followed by GE at 10.33 then BIG with a value of 9.33 ORCL and BAX follow with 7.11 and 5.61 respectively. Based on this analysis, an invested would prefer investing in any of the companies in the above order. However, using CAPM indicates otherwise. IBM has a return which is lower than the expected market return of 9%. In this case, it is not ideal to invest in IBM. However, the other four companies have their returns higher than expected market return and therefore are good investment options.
From the portfolio standard deviation, companies with high standard deviations are not good investment options and should not be included in the portfolio. Similarly, investors prefer to invest in companies with lower standard deviations because their stocks are less volatile. It is not advisable to invest in companies with volatile stocks because an investor is likely to lose their money in case the price goes down beyond the value at which it was bought.
From the selected companies, ORCL, BAX, and GE have equal standard deviations of 16%. However, BIG has a higher standard deviation of 32% and therefore not ideal for investment. Using ETFs, the most stable is SHY at 1% followed by LQD at 5.25, IEF and HYG are at 6% and 7.50% respectively. An investment portfolio with the three companies and the four ETFs would work for both clients.
Since Ezra is willing to invest in a risky portfolio, he can choose ORCL and GE stock and the first two ETFs. With the combination, he is likely to receive higher returns shortly. Jacob and Rachel, on the other hand, can invest in BAX because it is less risky and the first two ETFs.
Portfolio return after one year E(R) = ∑P i X R i
For Ezra E(R) = 0.02 * 0.12 + 0.1 *0.15 + 0.01 * 0.17 +0.07 *0.16
= 0.0024 +0.015 + 0.0017 + 0.0112
= 0.0303 or 3.03%
For Jacob and Rachel E(R) = -0.06 *0.13 + 0.01 * 0.17 +0.07 *0.16
=- 0.0078 + 0.0017 +0.0112
= 0.0207 or 2.07%
References
Parrino, R. (2015). Corporate Finance . Singapore: John Wiley & Sons.
Sule, A. (2010). Share Repurchases and Stock Valuation Models. CFA Digest , 40(1).
