9. Look up General Mills, Inc., and Kellogg Co. on the Standard & Poor’s Market Insight
website. The companies’ ticker symbols are
GIS and K.
What are the current dividend yield and price–earnings ratio (P/E) for each
company? How do the yields and P/Es compare to the average for the food industry and for the stock market as a whole? (The stock market is represented by
the S & P 500 index.)
What are the growth rates of earnings per share (EPS) and dividends for each
company over the last five years? Do these growth rates appear to reflect a steady
trend that could be projected for the long-run future?
Would you be confident in applying the constant-growth DCF valuation model to
these companies’ stocks? Why or why not?
10. Look up the following companies on the Standard & Poor’s Market Insight website: Citigroup (C), Dell Computer (DELL), Dow Chemical (DOW), Harley Davidson (HDI), and Pfizer, Inc. (PFE). Look at “Financial Highlights” and “Company Profile” for each company. You will note wide differences
in these companies’ price–earnings ratios. What are the possible explanations for these
differences? Which would you classify as growth (high-PVGO) stocks and which as income
stocks?
16. Look up Hawaiian Electric Co. (HI) on the Standard & Poor’s Market Insight website. Hawaiian Electric was one of the companies in
Table 4.2. That table was constructed in 2001.
What is the company’s dividend yield? How has it changed since 2001?
Table 4.2 projected growth of 2.6 percent. How fast have the company’s dividends
and EPS actually grown since 2001?
Calculate a sustainable growth rate for the company based on its five-year average
return on equity (ROE) and plowback ratio.
Given this updated information, would you modify the cost-of-equity estimate
given in Table 4.2? Explain.
17. Browse through the companies in the Standard & Poor’s Market Insight website. Find three or four companies for which the earnings-price ratio reported on the website drastically understates the market capitalization rate r for the company. (Hint: you don’t have to estimate r to answer this
question. You know that r must be higher than current interest rates on U.S. government
notes and bonds.)
2. Most of the companies in Tables 7.3 are covered in the Standard & Poor’s Market Insight
website. Pick at least three companies. For each company, download “Monthly Adjusted Prices” as an Excel spreadsheet. Calculate each company’s variance and standard deviation from the monthly returns given on the spreadsheet. The Excel functions are VAR and STDEV. Convert the standard deviations from monthly to annual units by multiplying by the square root of 12. How has the standalone
risk of these stocks changed, compared to the figures reported in Table 7.3?
11. Download the “Monthly Adjusted Prices” spreadsheets for Coca-Cola, Citigroup,
and Pfizer from the Standard & Poor’s Market Insight website.
Calculate the annual standard deviation for each company, using the most recent
three years of monthly returns. Use the Excel function STDEV. Multiply by the
square root of 12 to convert to annual units.
Use the Excel function CORREL to calculate the correlation coefficient between the
monthly returns for each pair of stocks.
Calculate the standard deviation of a portfolio with equal investments in each of
the three stocks.
13. Most of the companies in Tables 7.5 are covered in the Standard & Poor’s Market Insight
website. For those that are covered, you
can easily calculate beta. Download the “Monthly Adjusted Prices” spreadsheet, and
note the columns for returns on the stock and the S&P 500 index. Beta is calculated by
the Excel function SLOPE, where the “y” range refers to the company’s return (the dependent
variable) and the “x” range refers to the market returns (the independent
variable). Calculate the betas. How have they changed from the betas reported in
Table 7.5?
16. Download “Monthly Adjusted Prices” for General Motors (GM) and Harley Davidson
(HDI) from the Standard & Poor’s Market Insight website.
Calculate each company’s beta, following the procedure described in Practice
Question 13.
Calculate the annual standard deviation of the market from the monthly returns
for the S&P 500. Use the Excel function STDEV, and multiply by the square root of
12 to convert to annual units. Also calculate the annual standard deviations for GM
and HDI.
Let’s assume that your answers to (a) and (b) are good forecasts. What would be
the standard deviation of a well-diversified portfolio of stocks with betas equal to
Harley Davidson’s beta? How about a well-diversified portfolio of stocks with
GM’s beta?
How much of the total risk of GM was unique risk? How much of HDI’s?
5. Download “Monthly Adjusted Prices” for General Motors (GM) and Harley Davidson
(HDI) from the Standard & Poor’s Market Insight website. Use the Excel function SLOPE to calculate beta for each company.
(See Practice Question 7.13 for details.)
Suppose the S&P 500 index falls unexpectedly by 5 percent. By how much would
you expect GM or HDI to fall?
Which is the riskier company for the well-diversified investor? How much riskier?
Suppose the Treasury bill rate is 4 percent and the expected return on the S&P 500
is 11 percent. Use the CAPM to forecast the expected rate of return on each stock.
6. Download the “Monthly Adjusted Prices” spreadsheets for Boeing and Pfizer from the
Standard & Poor’s Market Insight website.
Calculate the annual standard deviation for each company, using the most recent
three years of monthly returns. Use the Excel function STDEV. Multiply by the square
root of 12 to convert to annual units.
Use the Excel function CORREL to calculate the correlation coefficient between the
stocks’ monthly returns.
Use the CAPM to estimate expected rates of return. Calculate betas, or use the most
recent beta reported under “Monthly Valuation Data” on the Market Insight website.
Use the current Treasury bill rate and a reasonable estimate of the market risk
premium.
Construct a graph like Figure 8.5. What combination of Boeing and Pfizer has the
lowest portfolio risk? What is the expected return for this minimum-risk portfolio?
8. Most of the companies in Table 8.2 are covered in the Standard & Poor’s Market Insight
website. For those that are covered, use
the Excel SLOPE function to recalculate betas from the monthly returns on the
“Monthly Adjusted Prices” spreadsheets. Use as many monthly returns as available,
up to a maximum of 60 months. Recalculate expected rates of return from the CAPM
formula, using a current risk-free rate and a market risk premium of 8 percent. How
have the expected returns changed from the figures reported in Table 8.2?
9. Go to the Standard & Poor’s Market Insight website, and find a low-risk income stock—Exxon Mobil or Kellogg might be good candidates. Estimate the company’s beta to confirm that it is well below 1.0. Use
monthly rates of return for the most recent three years. For the same period, estimate
the annual standard deviation for the stock, the standard deviation for the S&P 500,
and the correlation coefficient between returns on the stock and the S&P 500. (The
Excel functions are given in Practice Questions above.) Forecast the expected rate of
return for the stock, assuming the CAPM holds, with a market return of 12 percent
and a risk-free rate of 5 percent.
Plot a graph like Figure 8.5 showing the combinations of risk and return from a
portfolio invested in your low-risk stock and in the market. Vary the fraction
invested in the stock from zero to 100 percent.
Suppose you can borrow or lend at 5 percent. Would you invest in some
combination of your low-risk stock and the market? Or would you simply invest in
the market? Explain.
Suppose you forecast a return on the stock that is 5 percentage points higher than
the CAPM return used in part (a). Redo parts (a) and (b) with this higher
forecasted return.
Find a high-beta stock and redo parts (a), (b), and (c).
2. Look again at the companies listed in Table 8.2. Monthly rates of return for most of these companies can be found on the Standard & Poor’s Market Insight website—see the “Monthly Adjusted Prices” spreadsheet. This spreadsheet also shows monthly returns for the Standard & Poor’s 500 market index. What percentage of the variance of each company’s return is explained by the index? Use the
Excel function RSQ, which calculates R2.
3. Pick at least five of the companies identified in Practice Question 2. The “Monthly Adjusted
Prices” spreadsheets should contain about four years of monthly rates of return
for the companies’ stocks and for the Standard & Poor’s 500 index.
Split the rates of return into two consecutive two-year periods. Calculate betas for
each period using the Excel SLOPE function. How stable was each company’s beta?
Suppose you had used these betas to estimate expected rates of return from the
CAPM. Would your estimates have changed significantly from period to period?
You may find it interesting to repeat your analysis using weekly returns from the
“Weekly Adjusted Prices” spreadsheets. This will give more than 100 weekly rates of
return for each two-year period.
5. Identify a sample of food companies on the Standard & Poor’s Market Insight website. For example, you could try Campbell Soup (CPB),
General Mills (GIS), Kellogg (K), Kraft Foods (KFT), and Sara Lee (SLE).
Estimate beta and R2 for each company from the returns given on the “Monthly
Adjusted Prices” spreadsheet. The Excel functions are SLOPE and RSQ.
Calculate an industry beta. Here is the best procedure: First calculate the monthly
returns on an equally weighted portfolio of the stocks in your sample. Then
calculate the industry beta using these portfolio returns. How does the R2 of this
portfolio compare to the average R2 for the individual stocks?
Use the CAPM to calculate an average cost of equity (requity) for the food
industry. Use current interest rates—take a look at footnote 8 in this chapter—
and a reasonable estimate of the market risk premium.
19. Select a dozen companies from the Market Insight database. Estimate how much more these companies could borrow before
they would exhaust taxable profits.
15. Look back to the companies listed in Table 7.3. Most of these companies are covered in
the Standard & Poor’s Market Insight website, and most will have traded options. Pick at least three companies. For each company, download “Monthly Adjusted Prices” as an Excel spreadsheet. Calculate each company’s standard deviation from the monthly returns given on the spreadsheet. The Excel
function is STDEV. Convert the standard deviations from monthly to annual units
by multiplying by the square root of 12.
Use the Black–Scholes formula to value 3, 6, and 9 month call options on each
stock. Assume the exercise price equals the current stock price, and use a current,
risk-free, annual interest rate.
For each stock, pick a traded option with an exercise price approximately equal to
the current stock price. Use the Black–Scholes formula and your estimate of
standard deviation to value the option. How close is your calculated value to the
traded price of the option?
Your answer to part (b) will not exactly match the traded price. Experiment with
different values for standard deviation until your calculations match the traded
options prices as closely as possible. What are these this implied volatilites? What
do the implied volatilities say about investors’ forecasts of future volatility?
1. Look up the latest financial statements for any company on the Market Insight database and calculate a sources and uses of funds table
for the latest year. Don’t be put off by the fact that actual financial statements are more
complicated than the simplified ones we showed for Executive Paper.
2. Look up the latest financial statements for any company on the Market Insight database and calculate the following ratios for the latest year:
Debt ratio.
Times-interest-earned.
Current ratio.
Quick ratio.
Net profit margin.
Days in inventory.
Return on equity.
Payout ratio.
3. Select a sample of companies with financial statements on the Market Insight database
and compare the days in inventory and the average
collection period for receivables. Can you explain these differences?
12. Use the Market Insight database to find recent
balance sheets and income statements for two companies. Draw up a sources and uses
of cash statement and a sources and uses of funds statement as in Tables 30.4 and 30.6.
13. Select two companies from the Market Insight database (www.mhhe.com/
edumarketinsight). Use their latest financial statements to calculate some financial
ratios that throw light on their relative creditworthiness. Calculate a Z-score for each,
using the formula shown in Section 32.3. Now look at other indicators of creditworthiness,
such as the company’s bond rating or the return on its stock. Are the different
indicators providing consistent messages?
