Invst Thry Portfol Mgmt
Invst Thry Portfol Mgmt FIR 7410
University of Memphis
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This 6 page Class Notes was uploaded by Ashlynn Kuhn on Friday October 23, 2015. The Class Notes belongs to FIR 7410 at University of Memphis taught by Christine Jiang in Fall. Since its upload, it has received 15 views. For similar materials see /class/228430/fir-7410-university-of-memphis in Finance, Real Estate & Law at University of Memphis.
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Date Created: 10/23/15
General Information l The risk premium that I will be using in the 1999 and 2000 valuations for mature equity markets is 4 This is the average implied equity risk premium from 1960 to 2000 li For the valuations from 1998 and earlier I use a risk premium of 7 55 Con Ed Rationale for Model l The rm is in stable growth based upon size and the area that it serves Its rates are also regulated It is unlikely that the regulators will allow pro ts to grow at extraordinary rates ll Firm Characteristics are consistent with stable DDM model rm The beta is 080 and has been stable over time o The rm is in stable leverage The rm pays out dividends that are roughly equal to FCFE Average Annual FCFE between 1994 and 1999 553 million Average Annual Dividends between 1994 and 1999 532 million Dividends as of FCFE 962 Con Ed A Stable Growth DDM December 31 2000 Earnings per share for trailing 4 quarters 315 Dividend Payout Ratio over the 4 quarters 6921 Dividends per share for last 4 quarters 218 Expected Growth Rate in Earnings and Dividends 3 Con Ed Beta 080 Bottomup beta estimate Cost oquuity 51 0804 830 Value of Equity per Share 218 103 083 03 4237 The stock was trading at 3860 on December 31 2000 Con Ed Break Even Growth Rates Con Ed Value Venus Growth Rate 8000 7000 6000 5000 Implied Growth Rate Value per share 3860 4000 Value per Share 3000 2000 1000 000 500 400 300 200 100 000 100 200 300 Expected Growth Rate Estimating Implied Growth Rate I To estimate the implied growth rate in Con Ed s current stock price we set the market price equal to the value and solve for the growth rate Price per share 3860 218 gt 1g 083 g 0 Implied growth rate 251 l Given its retention ratio of 3079 and its return on equity in 1999 of 10 the fundamental growth rate for Con Ed is Fundamental growth rate 307910 308 Implied Growth Rates and Valuation Judgments When you do any valuation there are three possibilities The rst is that you are right and the market is wrong The second is that the market is right and that you are wrong The third is that you are m wrong In an ef cient market which is the most likely scenario Assume that you invest in a misvalued rm and that you are right and the market is wrong Will you de nitely pro t from your investment Yes No