NOTE: Each group must work completely alone on this project. No across group work of any type is permitted. This includes discussions concerning concepts, Excel, or any other aspect of the project. Treat this assignment as a group take home exam. If you have any questions on how to proceed, feel free to see me. Each member of the group must sign the Southwestern University Honor Code for me to grade your project. You may use the book, notes, other published sources, and the Internet for all parts of this assignment. Do NOT use direct quotes. Always footnote or use the (author,year) format to cite your references. If using the (author, year) format, be sure to include a bibliography.
All sheets must be stabled together in the upper left-hand corner of the page. On the top of the first page indicate whether you are enrolled in the 2:00 - 3:15 section or 3:30 - 4:45 section. Failure to either staple or indicate your section will result in a 5% reduction in your score.
In chapter 7, we discussed how the market sets the price of financial assets. A major determinant of the price was investors' expectations of the growth of earnings. In this project we want to examine investor expectations regarding growth rates. An examination of these expectations will allow an assesment of whether stocks are "properly" valued. Investors might vary greatly in exactly how they believe these firms will grow, but we will keep things simple. Let us assume that these firms will experience "unusual" growth over the next 10 years, then will have "normal" rates of growth.
Recall that for all financial assets we rely on the present value of future payments to determine prices. Here we want to apply that concept. The value of a corporation is just the present value of all future earnings. This, of course, would be an infinite sum. However, we derived a formula to measure the earnings of a corporation assuming earnings would go on forever (the Gordon Growth Model). Clearly you will need to use that formula to derive the value of the corporations after 10 years. To find the present value of earnings during the first 10 years, use the basic present value formula. Note, however, that the formula we used in class used dividends as the measure of cash flow. For this assignment, we will use earnings per share instead of dividends to calculate the value of a share of stock. Therefore, to calculate the price of the stock after 10 years we will use:
where EPS is the most recent earnings per share, g is the growth rate of earnings, and k is the market's desired rate of return on equities.
Your group needs to use Excel to determine what rate of growth over the next 10 years would justify the prices of a handful of stocks given their current earnings. Some of the data needed for this assignment are given below.
Specifics:
Attach your table to a memo to me regarding your findings and give a quick summary. You need to discuss whether you believe (based on expected growth over the next 10 years) some of these prices are too high or too low.
Also attach the spreadsheet you used to find the growth rate for one
of the stocks and print out the formulas from your spreadsheet.
Unfortunately, there is no simple formula to solve for the 10 year growth
rate. Instead, you need to set up a spreadsheet that calculates the price
and try different growth rates until you get a price close to the actual
price.
| Corporation | Symbol | EPS | Price |
| Toyota | TM | 7.65 | 115.02 |
| Proctor & Gamble | PG | 2.64 | 62.41 |
| GOOG | 6.85 | 423.27 | |
| Amazon.com | AMZN | 0.71 | 33.47 |