Intrinsic Value of Sugar Land Co.
Order ID 53563633773 Type Essay Writer Level Masters Style APA Sources/References 4 Perfect Number of Pages to Order 5-10 Pages
Intrinsic Value of Sugar Land Co.
Assignment for Fin 4320
Here are data on two companies. The T-Bill rate is 4% and the market risk premium is 6%
Company Victoria Store Houston Store
Forecasted return 12 % 11 %
Standard Deviation of Returns 8 % 10 %
Beta 1.5 1.0
- Estimate the expected return for each company according to CAPM
- Characterize each company as underpriced, overpriced, or properly priced according to CAPM
- Another company, Sugar Land store, has a beta of 2.0. Assuming efficient market hypothesis
(CAPM holds), estimate the expected rate of return for a portfolio consisting of 1/3 Victoria
stock, 1/3 Houston stock, and 1/3 Sugar Land store.
You are the financial adviser to three individuals, a Young person with high risk tolerance, a Middle
aged person with medium risk tolerance and an old person with low risk tolerance. Here are the current
Risk free asset is earning 12 % per year.
Risky asset (or market portfolio) has expected return of 30% per year and standard deviation of 40%.
Using the mutual fund theorem or Separation theorem
- Construct an appropriate portfolio (Mix of risky asset and risk-free asset) for your young client
and estimate the expected return and standard deviation of your young client for the coming year.
- Construct an appropriate portfolio for your middle-aged client and estimate the expected return
and standard deviation of your middle-aged client.
- Construct an appropriate portfolio for your old client and estimate the expected return and
standard deviation of your old client.
- If your middle-aged client requires a portfolio with a standard deviation of 30%, what is its
expected rate of return?
Sugar Land Co. is a fast-growing firm and no dividend will be paid on the stock over the next 9
years. The company then will pay a $12 dividend per share in year 10 and will increase the
dividend by 5 percent forever. If the required rate of return for this stock is 13 %, what should
be the intrinsic value of Sugar Land Co.?
a Problem 4:
Victoria bond is a premium bond with 8% coupon. Houston bond is a 4 % coupon bond currently
selling at a discount. Both bonds make annual payments and have a yield to maturity (YTM) of
6%, and have 5 years till maturity.
- Estimate their prices (Bond prices).
- Estimate their current yields
- If interest rates remain unchanged by next year, estimate their prices a year from now.
- Estimate their first-year capital gain yields. Hint: CGY = (P1-P0)/P0
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