Yahoo Finance is a useful source for the data that you will need.
- (30) We begin by breaking down the prices of these stocks using the dividend discount growth model.
(a) (10) Report the stock price and book value per share, alongside the forecasted dividend and earnings per share, using any reasonable estimate. Going by these statistics, which of your stocks looks more like an income stock and which looks more like a growth stock?
JNJ (Johnson and Johnson) stock price: 163.13USD book value per share: 24.07USD
Price Earnings Ratio= market value per share/earning per share=161.13/5.6=28.7732
Price-to-Book Ratio=stock price/book value=161.13/24.07=6.69
NKE(Nike) stock price: 137.60 USD book value per share : 6.75 USD
Price Earnings Ratio= market value per share/earning per share=137.60/1.79=76.87
Price-to-Book Ratio=stock price/book value=137.60/6.75=20.385
JNJ Group has higher P/E and P/B, so JNJ is the a growth stock and NIKE is more likely the income stock.
(b) (10) For each stock, calculate the payout ratio and return on book equity, and compute the growth rate that this implies.
Payout ration of JNJ
=cash dividend/ net income
= 1.01USD/SHARE26.2910^8SHARES/(541.610^8usd) =4.90% return on book equity of JNJ =earning per share/book value per share =5.6/24.07 =23.27% Growth rate of JNJ =(1-D/E)ROE
=(E-D)/B0
=(5.6-1.01)/24.07
=19.06%
Payout ration of NKE
=cash dividend/ net income
= 0.275USD/SHARE15.7610^8SHARES/(95.8810^8usd) =4.52% return on book equity of NKE =earning per share/book value per share =1.79/6.75 =26.52% Growth rate of JNJ =(1-D/E)ROE
=(E-D)/B0
=(1.79-0.275)/6.75
=22.44%
(c) (10) For each stock, calculate the market capitalization rate, and break down the share price into the level earnings and growth opportunities components.
capitalization rate of JNJ=net operating income/current market value of the property=
LEVEL EARNINGS=
GROWTH OPPORTUNITIES=
capitalization rate of NKE=net operating income/current market value of the property=
LEVEL EARNINGS=
GROWTH OPPORTUNITIES=
- (30) For the sake of simplicity, assume that in each year, each company has a single investment opportunity to plow back some percentage of its earnings to generate annual cash flows at a rate equal to the its current return on book equity.
(a) (10) For each company, consider the investment opportunity available next year (t = 1). Calculate the payback period, internal rate of return, and net present value NPV1 of next year’s investment opportunity. Are these projects worth pursuing?
JNJ:
Payback period
Internal rate of return
Net present value:
NKE:
Payback period
Internal rate of return
Net present value:
I think is wother persuing because
(b) (10) Now consider each company’s investment opportunity at t = 2, with annual earnings permanently increased by the cash flows from the year 1 investment. If the firm continues to plow back the same proportion of earnings and earns the same return on equity, what is the net present value NPV2 of the project?
JNJ:
NPV2=
NKE:
NPV2=
(c) (10) If each company continued to plow back earnings at the same rate and earn the same return on equity, what would be the present value of all its future growth opportunities? Does this match your answer from #1?
JNJ:
NKE:
This doesn’t match the answer from#1
- (40) We will now analyze the historical returns of your chosen stocks. You may choose any time period and frequency you deem suitable, but make sure that all of your returns are reported as annualized rates. You will want to use the adjusted closing price to automatically account for the effects of dividends and splits.
(a) (10) For each stock as a well as a suitable market index, report the mean and standard deviation of returns.
JNJ:
MEAN
STANDARD DEVIATION
NKE:
MEAN
STANDARD DEVIATION
(b) (10) Find the variance-covariance matrix of the two stocks and the market index, and report the beta of each stock.
JNJ:
variance-covariance matrix
the market index
BETA
NKE:
variance-covariance matrix
the market index
BETA
(c) (10) We now consider the benefits of diversifying by constructing a portfolio consisting of both of your stocks. For each value of x = 0, 0.1, 0.2, . . . , 1 , consider a portfolio with a proportion x of your wealth invested in your first stock and 1 x invested in the second, and compute the mean and standard deviation of the portfolio return.
JNK:
MEAN
STANDARD DERIATION
NKE:
MEAN
STANDARD DERIATION
(d) (10) Assume a risk free rate of rf = 0.01. In a well-diversified portfolio, only market risk matters, so the risk premium of any stock should be proportional to its beta. If this were true, what should be the returns you expect to earn from your two stocks, and how does this compare to their historical averages?
EXPECT RETURN FROM JNJ:
EXPECT RETURN FROM NKE:
Compared to historical averages