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Investment analysis of a publicly traded stock

**INTRODUCTION:**

The objective of this project is to familiarize you with the investment analysis of a publicly traded stock. You will assume the role of a financial analyst. Your task is to value the common stock of a public company and issue a recommendation to investors whether to buy, sell or hold the stock.**SELECTING A COMPANY**:

Your first task is to select a company for your project. The company must be listed in a stock exchange and paying dividends. You are not allowed to select a service provider, such as a bank, an insurance company, etc. **ECONOMIC ANALYSIS:** Your second task is to conduct an economic analysis.

• What is the state of the overall economy?

• Describe key economic measures such as GDP, interest rate, inflation, consumer spending, etc.**INDUSTRY ANALYSIS**: Your third task is to conduct an industry analysis.

• What is the nature of the industry?

• Who are the major competitors in the industry?

• How important are technological developments?

• Which economic forces have the most impact on the industry?**COMPANY ANALYSIS**: Your fourth task is to conduct a company analysis.

Collect the income statements and balance sheets of the company and a major competitor.

• Calculate the liquidity, efficiency, financial leverage and profitability ratios for the company for 2011 and 2012 and the competitor for 2012.

• Evaluate the financial condition and operating results of the company using both time-series and cross-sectional analysis.

**ESTIMATING BETA**: Your fifth task is to collect the monthly stock prices of the company and the market index between January 2008 and December 2012.

• Enter the data into Excel.

• Calculate the monthly return of the stock and the market index between January 2008 and December 2012.

• Estimate the beta of the stock using regression analysis.**ESTIMATING THE INTRINSIC VALUE OF THE STOCK:** Your sixth task is to estimate the intrinsic value of the stock.

• Collect the dividend per share paid by the company in 2012.

• Estimate the constant dividend growth rate of the stock for the foreseeable future. You need to justify this rate based on your economic, industry and company analyses.

• Determine the required rate of return on the stock using the Capital Asset Pricing Model. You may use 13% as the market return and 8% as the risk-free rate.

• Estimate the intrinsic value of the stock using the constant growth dividend valuation model.**CONCLUSION AND RECOMMENDATION:** Your final task is to make a recommendation.

• Provide a summary of your economic, industry and company analyses which should shed some lights on the future prospects of the company.

• Compare the intrinsic value calculated above to the market price (the stock price on 31 December 2012) and determine whether the stock is undervalued or overvalued.

• State your recommendation to buy, sell or hold the stock.

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## Q : Accrual basis accounting

Which of the following statements about accrual basis accounting is true?