# FIN550 Financial Markets And Institutions

## Question:

Lauren Entertainment, Inc., has an 18 percent annual growth rate compared to the market rate of 8 percent. If the market multiple is 18, determine P/E ratios for Lauren Entertainment, Inc., assuming its beta is 1.0 and you feel it can maintain its superior growth rate for:

1. Compute the growth duration of each company stock relative to the S&P Industrials.
2. Compute the growth duration of Company A relative to Company B.
3. Given these growth durations, what determines your investment decision?

The value of an asset is the present value of the expected returns from the asset during the holding period. An investment will provide a stream of returns during this period, and it is necessary to discount this stream of returns at an appropriate rate to determine the asset's present value. A dividend valuation model such as the following is frequently used:

Where:

1. Identify the three factors that must be estimated for any valuation model, and explain why these estimates are more difficult to derive for common stocks than for bonds.
2. Explain the principal problem involved in using a dividend valuation model to value:

(1) companies whose operations are closely correlated with economic cycles.

(2) companies that are of very large and mature.

(3) companies that are quite small and are growing rapidly.

Assume that all companies pay dividends.

The constant-growth dividend discount model can be used both for the valuation of companies and for the estimation of the long-term total return of a stock.

1. Using only the preceding data, compute the expected long-term total return on the stock using the constant-growth dividend discount model.
2. Briefly discuss three disadvantages of the constant-growth dividend discount model in its application to investment analysis.
3. Identify three alternative methods to the dividend discount model for the valuation of companies.

An analyst expects a risk-free return of 4.5 percent, a market return of 14.5 percent, and the returns for Stocks A and B that are shown in Exhibit 14.24.

(1) where Stocks A and B would plot on the security market line (SML) if they were fairly valued using the capital asset pricing model (CAPM).

(2) where Stocks A and B actually plot on the same graph according to the returns estimated by the analyst and shown in Exhibit 14.24.

State whether Stocks A and B are undervalued or overvalued if the analyst uses the SML for strategic investment decisions.

Lauren Turk is reviewing Francesca Toy's financial statements in order to estimate its sustainable growth rate. Using the information presented in Exhibit 14.25:

(1) identify and calculate the three components of the DuPont formula.

(2) calculate the ROE for 2011, using the three components of the DuPont formula.

(3) calculate the sustainable-growth rate for 2011.

Turk has calculated actual and sustainable growth for each of the past four years and finds in each year that its calculated sustainable-growth rate substantially exceeds its actual growth rate. Cite two courses of action (other than ignoring the problem) that Turk should encourage Francesca Toy to take, assuming the calculated sustainable-growth rate continues to exceed the actual growth rate.

### Cite This Work

My Assignment Help. (2021). FIN550 Financial Markets And Institutions. Retrieved from https://myassignmenthelp.com/free-samples/fin550-financial-markets-and-institutions/security-analysis-for-investment.html.

My Assignment Help (2021) FIN550 Financial Markets And Institutions [Online]. Available from: https://myassignmenthelp.com/free-samples/fin550-financial-markets-and-institutions/security-analysis-for-investment.html
[Accessed 28 January 2023].

My Assignment Help. 'FIN550 Financial Markets And Institutions' (My Assignment Help, 2021) <https://myassignmenthelp.com/free-samples/fin550-financial-markets-and-institutions/security-analysis-for-investment.html> accessed 28 January 2023.

My Assignment Help. FIN550 Financial Markets And Institutions [Internet]. My Assignment Help. 2021 [cited 28 January 2023]. Available from: https://myassignmenthelp.com/free-samples/fin550-financial-markets-and-institutions/security-analysis-for-investment.html.

## Stuck on Any Question

250 words

### We Can Help!

Get top notch assistance from our best tutors !

### Content Removal Request

If you are the original writer of this content and no longer wish to have your work published on Myassignmenthelp.com then please raise the content removal request.

## 5% Cashback

On APP - grab it while it lasts!