Stock Valuation

The actually expected return on a stock based on estimates of future dividends and future price can be compared to the "required" or equilibrium return given its risk. If the expected return is greater than the required return, the stock may be an attractive investment.

1. First calculate the expected holding period return (HPR) on Target Corporation's stock based on its current price, its expected price, and its expected dividend.
1. Go to http://moneycentral.msn.com/investor/home.asp and link to the Stock Research Wizard. Enter TGT to find information about Target Corporation. Find the average estimated target price for the next fiscal year.
2. Click on the "Company Report" link and collect information about today's price and the dividend rate. Calculate the company's expected dividend in dollars for the next fiscal year.
3. Use these inputs to calculate Target's expected HPR for the next year.
2. Calculate the required return based on the Capital Asset Pricing Model (CAPM).
1. Use a risk-free rate from http://moneycentral.msn.com/investor/market/treasuries.aspx
2. Use the beta coefficient shown in Target's Company Report.
3. Calculate the historical return on a broad-based market index of your choice. You may use any time period that you deem appropriate. Your goal is to derive an estimate of the expected return on the market index for the coming year.
4. Use the data you've collected as inputs for the CAPM to find the required rate of return for Target Corporation.
3. Compare the expected HPR you calculated in Part 1 to the required CAPM return calculated in Part 2. What is your best judgment about the stock's current status – do you think it is selling at an appropriate price?

Equity Valuation

Go to moneycentral.msn.com/investor/home.asp.

Use the Research Wizard function to obtain fundamentals, price history, price target, and comparison companies for three different firms.

1. What has been one-year sales and income growth for each firm?
2. What has been the five-year profit margin? How does that compare with other firms in the industry?
3. What have been the percentage price changes for the last 3, 6, and 12 months? How do they compare with industry values?
4. What is the estimated high and low price for this firm the coming year using the current P/E multiple?
5. Which of the companies appears to be the most attractive investment opportunity?