Concept explainers
USING PAST INFORMATION TO ESTIMATE REQUIRED RETURNS
Use online resources to work on this chapter’s questions. Please note that website information changes over time, and these changes may limit your ability to answer some of these questions.
Chapter 8 discussed the basic trade-off between risk and return. In the
As mentioned in Web Appendix 8A, beta can be estimated by regressing the individual stock’s returns against the returns of the overall market. As an alternative to running our own regressions, we can rely on reported betas from a variety of sources. These published sources make it easy for us to readily obtain beta estimates for most large publicly traded corporations. However, a word of caution is in order. Beta estimates can often be quite sensitive to the time period in which the data are estimated, the market index used, and the frequency of the data used. Therefore, it is not uncommon to find a wide range of beta estimates among the various Internet websites.
On the summary screen, you should see an interactive chart. Typically, you can chart performance over the last 24 hours, 1 month, 6 months—up to 5 years, or even longer. Select different time periods and watch how the graph changes. On this screen you should also see a menu to select historical prices (historical data). Some websites will not only show daily activity but also weekly or monthly activity In addition, some websites will allow you to download the data into an Excel spreadsheet.
Want to see the full answer?
Check out a sample textbook solutionChapter 8 Solutions
FUND.OF FINANCIAL MGMT:CONCISE-MINDTAP
- Using Past Information to Estimate Required Returns Use online resources to work on this chapter's questions. Please note that website information changes over time, and these changes may limit your ability to answer some of these questions. Chapter 8 discussed the basic trade-off between risk and return. In the capital asset pricing model (CAPM) discussion, beta was identified as the correct measure of risk for diversified shareholders. Recall that beta measures the extent to which the returns of a given stock move with the stock market. When using the CAPM to estimate required returns, we would like to know how the stock will move with the market in the future, but because we dont have a crystal ball, we generally use historical data to estimate this relationship with beta. As mentioned in Web Appendix 8A, beta can be estimated by regressing the individual stock's returns against the returns of the overall market. As an alternative to running our own regressions, we can rely on reported betas from a variety of sources. These published sources make it easy for us to readily obtain beta estimates for most large publicly traded corporations. However, a word of caution is in order. Beta estimates can often be quite sensitive to the time period in which the data are estimated, the market index used, and the frequency of the data used. Therefore, it is not uncommon to find a wide range of beta estimates among the various Internet websites. 4. Select one of the four stocks listed in question 3 by entering the company's ticker symbol on the financial website you have chosen. On the screen you should see the interactive chart. Select the six-month time period and compare the stock's performance to the SP 500's performance on the graph by adding the SP 500 to the interactive chart. Has the stock outperformed or underperformed the overall market during this time period?arrow_forwardThe file Fortune500 contains data for profits and market capitalizations from a recent sample of firms in the Fortune 500 a. Prepare a scatter diagram to show the relationship between the variables Market Capitalization and Profit in which Market Capitalization is on the vertical axis and Profit is on the horizontal axis. Comment on any relationship between the variables. b. Create a trendline for the relationship between Market Capitalization and Profit. What does the trendline indicate about this relationship?arrow_forwardTo estimate the required rate of return on a stock we can use the Capital Asset Pricing Model (CAPM) or the Discount Dividends Model. How we can decide which model to use? Explain.arrow_forward
- Assuming that the required rate of return is determined by the CAPM, explain how you would usethe dividend growth model to estimate the pricefor Stock i. Indicate what data you would need,and give an example of a “reasonable” value foreach data input. How would this be differentif you used free cash flows as the basis for yourevaluation?arrow_forwardSelect all that are takeaways with respect to risk and return in financial markets that we gleaned from historical data. Group of answer choices In a competitive market, one should expect higher returns for taking on more risk In a competitive market, one will earn a higher return if they take on more risk Individual stocks and portfolios (of those individual stocks), by definition, exhibit the same risk-return trade offs We use historical data to quantify the risk-return relation because we know this same relation will hold in the futurearrow_forward1. How do you think today's low interest rate environment is impacting the time value of money? How might this change the value of an asset or liability? 2. What is the relationship between the concepts of net present value and shareholder wealth maximization? 3. Offer some reasons that the intrinsic value that you might calculate with the methodologies learned might yield a price different than what the stock trades at in the stock market. You can reference any method of valuation models in offering thoughts on why there might be differences between intrinsic and market values.arrow_forward
- 10. Recapitalization Aa Aa Firms use recapitalization for different reasons. Recapitalization is the process through which firms make desired changes in their capital structure by using debt to repurchase equity. Firms may decide to recapitalize for various reasons, such as to maintain an optimal capital structure, to use as a defense mechanism against a hostile takeover, to minimize taxes, or to use in an exit strategy for venture capitalists. As an analyst, you are tracking the financial performance of Gadgetime Inc. The company has been 100% equity owned but recently made changes to its capital structure. You have collected the following information about the recapitalization: • Gadgetime issued $17,500,000 in new debt to buy back stock. • The firm had no short-term investments before or after the recapitalization. • Gadgetime had 1,750,000 shares outstanding before the recapitalization. • Gadgetime's capital structure now has 25% debt. The company's operations are valued at $70…arrow_forwardA security analyst wants to analyze the stock of Exide Industries. Comment and analyze the stock on the following parameters: 1) ALTMAN Z Score2) ROCE3) Book Value of unquoted investment4) Market Value of Quoted Investment5) Debt to Profit In order to analyze the stock, screenshot of Exide Industries is attached below:arrow_forwardAnswer quickly After making an investment, an investor learns that Intel stock is now undervalued. This is an illustration of a. Market Interruption b. Portfolio Management c. Security Analysis d. Asset Allocationarrow_forward
- Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningFundamentals of Financial Management (MindTap Cou...FinanceISBN:9781285867977Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningFundamentals Of Financial Management, Concise Edi...FinanceISBN:9781337902571Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
- Essentials of Business Analytics (MindTap Course ...StatisticsISBN:9781305627734Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. AndersonPublisher:Cengage LearningEBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT