Calculate daily change and daily change percent in order to calculate returns on both items. Calculate these analyses:,TOTAL RISK,Convert your stock price and index data to time series if you have not already done so. You will be calculating daily (or something close) returns. Calculate the mean, standard deviation and coefficient of variation using the functions in EXCEL. Do not forget to add the dividend back into the stock on any dates the stock goes “ ex-dividend.” Dividends are also a return to shareholders., ,MARKET RISK,1. Calculate your company’s beta using Excel to calculate the Standard Deviation of the percent changes in your stock and the percent changes in the market, as well as calculating the Correlation between the two. Beta = (standard deviation of your security/standard deviation of the market) times (Correlation between your security and the market). In calculating both standard deviations, it is the standard deviation of the percent changes (not the standard deviation of the raw values) that is used.,2. Look up your company’s beta. It is available on all of the Finance web sites. Be sure to document where you picked up your beta. Be sure that the site uses the S&P500 Index as the “market” for its Beta calculation. The NASDAQ site listed above does use the S&P500 Index.,ESTIMATING THE COST OF EQUITY,1. CAPM,Estimate the parameters of the Capital Asset Pricing Model. Find a current estimate of the risk-free rate (use the most current 30 day T-Bill rate available at http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/daily_treas_bill_rates.shtml listed as “4 weeks”)., ,Estimate the market risk premium. There is a good source for the market risk premium at Ken French’s web site in the data section (URL: http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html). Note … he states the premium as a negative number (that is, it is stated as a discount). Ignore the negative sign … treat it as a positive number., ,He is a finance professor at Dartmouth and he maintains a database for all to use. The data is listed under Current Benchmark Returns: use Rm-Rf for the most recent listed month as the current value of the market risk premium. Combine your estimate of beta (not the published Beta), the risk-free rate, and the market risk premium to estimate the cost of equity for your company using the CAPM., ,2. DISCOUNTED CASH FLOW MODEL,Estimate the expected return on equity using the DCF model: rS = D1/P0 + g.,For your estimate of the growth rate use the analyst’s forecast of earnings growth that can be found at the same NASDAQ site where you have been picking up your stock data. Assume that dividends will grow at the same rate as earnings., ,You can estimate the market’s forecast of next year’s earnings as follows:,1. Find the current share price,2. Find the “Forward 1-year P/E”,3. Next year’s EPS = Price/Forward PE,4. Earnings growth = (Next Year EPS – Current EPS)/(Current EPS), ,3. BOND YIELD PLUS RISK PREMIUM,Estimate rS using the bond yield plus risk premium approach. Per theory, you should use the market Yield-To-Maturity for the company’s most senior issue. However, that data can be hard to get. For the purpose of this assignment use the coupon rate for the longest maturity bond issued by the company (the most recent 10K report will have those in the footnotes to the financial statements). If you can find the market Yield-To-Maturity, do use that. The best current estimate of the equity risk premium is 4.74%.(Graham and Harvey, 2009). Also, a summary on the analyses found,,
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