Dividend Discount Model

4301 Words Sep 18th, 2012 18 Pages
Financial Market Revision
Question 1 Performance Evaluation Calculation Discursive 20% 80% Question 2 Dividend Valuation Model 45% 55% Question 3 Option strategies Straddles 80% 20% Question 4 Duration and convexity –Price – yield relationship 30% 70% Question 5 Option and Futures -mixed N/A 100% Question 6 CAPM 40% 60%

Dividend Discount Models 1. The intrinsic value, denoted V0, of a share of stock is defined as the present value of all cash payments to the investor in the stock, including dividends as well as the proceeds from the ultimate sale of the stock, discounted at the appropriate risk-adjusted interest rate, k. Whenever the intrinsic value, or the investor’s own estimate of what the stock is really worth, exceeds the market
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What is the firm value, assuming no growth opportunities? What is the present value of the firm’s growth opportunities? The risk free rate of return on Treasury bills is 4.8%. The market risk premium is 6% and Innovation’s share beta is 1.2. b) Calculate Innovation’s price-earnings ratio and the price-book ratio (i.e. the ratio of the market value to book value) as of 31 December 2002. c) What are the advantages and disadvantages of each of the three valuation methods used in (a), and (b)? d) State whether Innovation’s share is overvalued or undervalued as of 31 December 2002. Support your conclusion using your answers to previous questions and any data provided. The past 10-year average FTSE All Share index relative price-earnings and price-book ratios for Innovation were 0.4 and 1.12, respectively.

9 a. Dividend Discount Model The oldest discounted cash flow models in

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