Portfolio Management

Posted: August 26th, 2021

Portfolio Management

Name

Institutional Affiliation

SECTION 1

Question 1                              

PVGO refers to thepresent value of growth opportunities that measure the portion of a company’s stock value and indicates the growth in future earnings. It is used in equity valuation and is given by the variation of the present value of a share and the present value of its earnings when the growth rate is zero (Makrominas, 2017). It adopts two assumptions, which are no earnings are reinvested and the present value of growth opportunities.

Current market value= $50

Expected earnings= $3.64

Required returns= 9%

=9.55556

Question 2

Stock valuation refers to the procedure of determining the intrinsic value of a stock price (Song, 2017).Absolute valuation and relative valuation techniques are used in the calculation of stock valuation. DCF analysis, precedent transaction analysis, and comparable company analysis are used in the valuation of going concern businesses (Radha and Shree, 2017).

Return on equity (ROE) = 9%

Beta =1.30

Plowback ratio= 1/3

Latest earnings= $2.90

Market returns= 11%

T-bills returns= 5%

12.8%

20.31973

Question 3

Security’s intrinsic value is the stock price based on the internal business environment and eliminates the external environment included in the market prices. Discounted cash flow (DCF) is a technique used in the valuation of financial instruments (Jansen, 2017). It adopts business cash flows and not dividends to calculate the business value. The intrinsic value of a stock is given by business value divided by outstanding shares in the market (Rivenbark, 2017).Based on the following details, the Xyrong stock’s intrinsic value can be obtained as follows:

Risk free rate= 8%

Expected return= 20%

Beta coefficient= 1.2

Dividend payout= 60%

Latest earnings= $10.50

Return on equity (ROE) = 20%

Where: D1= expected dividends

             r= required returns

            g= growth rates

Where: Latest earnings= $10.50

             Risk free rates= 8%

             Dividend payout= 60%

= $ 6.8

Where: Risk-free rate= 8%

             Beta coefficient= 1.2

            Expected returns= 20%

Where: Expected returns= 20%

            Dividend payout= 60%

Question 4

Latest earning per share (EPS) =$13

Expected return on equity (ROE) for the next year = 17%

Dividend payout ratio= 12%

Market capitalization= 20%

Digital Electronic Quotation System (DEQs) will not pay a dividend for five years

DEQ ROE from the 6^th year= 35%

Thus, the expected growth rate for the next five years is as follows;

The company will report a growth rate of 17% in the next five (5) years. The expected growth rate (g1) in dividend from year six onwards, hence;

=7.8%

 $82.35761

Question 5

Dividend per share= $1

Growth rates =2%

Dividend payout = $ 1

Dividend growth rates for year 2 & 3= 12%

Dividend growth rates from year 4 to infinity= 4%

Beta=1.2

ROE= 10%

Rate of return=10%

Table 1: Present Vaue

	Present Value if Rate of Return is 10% (PVIF@ 10%)	Present Value, PV
D1 = 1.00	0.91	0.91
D2 = 1.12	0.82	0.93
D3 = 1.25	0.75	0.94
D4 = 1.30	0.75	16.34
		19.11

 From Table 1 above, the current share price is $19.11

Question 6

Stock price P0 = $80

The risk premium is 8%

 Risk free rate = 4%

Dividend at year 1= dividend at year 2

Dividend at year three onwards will grow at 5.1%

Dividend at year 3

= 1.051D1

Dividend growth at year 2

 = 15.23D1

The present value of future dividend and discounted P3 at Ke

= 5.73

Dividend per share for the 1^st year = $ 5.78

SECTION 2

From: [your name] Sent: 31 March 2020 9:00am To: James Harvey, Subject: RE: Stock pricing Dear James Harvey, The following is a brief answer to your above questions; Question 1 Risk aversion, regret aversion, and loss aversion may sound the same but are different financial terminologies.The primary difference is on the investor’s perspective and his viewpoints on the aversion. Below is the financial explanation of the three terms. Risk Aversion  It is a financial term that is referred to when a person is exposed to a risk, which he tries to mitigate that uncertainty. This is the indecision of a person to agree to a specific situation with unknown risk other than a particular circumstance with known risk. Loss Aversion       It is defined as the desire of a person not to undergo nor experience loss. This aversion makes individuals resist change. Regret Aversion        It is used when anindividual is making a decision; in this case, one can expect regret from his choices. Therefore, the desire to eliminate any possibility of regret after decision-making describes this risk. Thus, the main difference in these aversions is the basis of human behavior. Question 2            The constant-growth DDM, two-stage growth DDM, and FCFF models are terms used to describe equity valuation by calculating the future earnings of a financial instrument to an investor. Companies use these techniques to estimate the future earnings of investors. Equity valuation methods serve the same purpose though they have different meanings as described in the following paragraph. Dividend discount model (DDM)is an equity valuation technique used by companies to value their stocks.DDM works on the theorem that theshare value is worth the aggregate of the present value of the future dividend payout. Constant growth DDM is used to calculate the present value of future dividends, which have a constant growth rate. Two-stage growth DDM is used to calculate the valuation of financial instruments, which have two parts of different rates of growth. In the first phase, the rate of growth remains constant for a stipulated period but changes to a different growth rate for the second stage. Free cash flow to a firm (FCFF) is the cash presented to investors after the company clears its operating costs and invests in short-term and long-term assets. Thus, it is the money left in a company for the investors. Question 3 Due to the endemic of coronavirus(COVID-19), many businesses around the world are facing problems to operating and going concerned. A decline in the stock price couples this and shareholders are losing interest in the businesses, investments, and are making withdrawals. This dramatic downfall of shares can be because of otherbusiness factors such as unfavorable political environment, economic factors, and ecological factors affecting the businesses negatively.However, not every company in the worldis facing this dramatic downfall. Some companies maybe using this as a business opportunity to cash their accounts. They may expect increased business operations leading to an increase in stock price. This maybe the case of XYZ company though it does not imply that their stock is currently overpriced. The share price may not fall in the future as the business course cannot be fully anticipated but only predicted. Kind Regards, [Your Name]

References

Jansen, B. (2017). Intrinsic Value in Stock Return. Available at SSRN 2840035.

Makrominas, M. (2017). Recognized intangibles and the present value of growth options. Review of Quantitative Finance and Accounting, 48(2), 311-329.

Radha, B., & Shree, A. B. (2017). A Study on Corporate Valuation of Selected Indian Firms.      Indian Journal of Commerce and Management, 3(6).

Rivenbark, W. C. (2017). The intrinsic value of cost accounting for benchmarking service efficiency. In Cost Accounting in Government (pp. 70-89). Routledge.

Song, L. (2017). The effects of accounting regulations on stock valuation and volatility:    Evidence from the banking industry. Journal of International Financial Management &            Accounting, 28(2), 205-229.