Given a risk free rate of 5%, a market return of 15%, and the information for stocks A and B in the following table, determine if stock A and stock B are undervalued or overvalued if they are valued by the security market line.

Assignment 3

 

Assignment 3, which is worth 15 percent of your total grade for the course, is made up of 14 questions worth a total of 85 marks. Review the “Course Assignments” page in the Welcome and Orientation section of this course website for important information regarding requirements for submitting your answers to problem-solving questions. Include your student ID number and contact information on the top page of your assignment. If you have any questions about Assignment 3, contact the Student Support Centre.

 

1.       Given a risk free rate of 5%, a market return of 15%, and the information for stocks A and B in the following table, determine if stock A and stock B are undervalued or overvalued if they are valued by the security market line.

 

2.

 

 

 

 

2.

 

A stock has an expected ROE of 14% per year, expected earnings per share of $3, and retention ratio of 40%. Its market capitalization rate is 11% per year. What are its expected growth rate, its price, and its P/E ratio?(6 marks)

 

3.       To estimate the value of a stock, an analyst may use the dividend discount model, multiply the forecast of the stock’s next period earnings per share by the P/E ratio, or estimate the present value of expected future free cash flows. How are the three methods related? Discuss their strengths and weaknesses.(5 marks)

 

4.       The textbook expresses ROE two different ways:

 

 

 

Why is ROE written two different ways? What implicit assumptions are required for these two formats to make sense?(6 marks)

 

5.       Collect data on the S&P/TSX Composite index for two months on a daily basis. Calculate the five-day moving average for each day, then discuss the trend of the index.(7 marks)

 

6.       Is an at-the-money call option on a stock more expensive than an at-

 

the-money put option on the same stock with the same maturity and same strike price? Prove your answer.

 

7.

 

A three-month European call on a non-dividend-paying stock is currently selling for $1. The strike price of the option is $85. The underlying stock trades for $85. The risk-free interest rate is 6%. Does an arbitrage opportunity exist? If you answered “yes,” expla

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