Review the excerpted table of historic returns shown below. The returns have all been annualized after having calculated monthly returns for the previous ten years. In addition, information is provided about the average, the volatility, and the sensitivity of the possible investments. Time Period # Market Return Firm W Firm X Firm Y Firm Z T-Bill 1 0.333 0.191 0.218 0.955 0.601 0.035 2 -0.144 -0.423 -0.632 -0.747 -0.472 0.039 3 0.143 0.348 0.470 0.379 0.378 0.040 4 0.316 0.871 0.868 -0.192 0.502 0.036 5 0.178 0.912 0.499 0.694 0.364 0.036 6 -0.014 0.532 0.168 -0.671 -0.064 0.038 … … … … … … … … … … … … … … 119 0.374 0.556 1.014 0.023 0.698 0.037 120 0.173 0.547 0.092 0.658 0.222 0.036 Average Return 0.082 0.113 0.067 0.167 0.121 0.029 Standard Deviation 0.156 0.369 0.497 0.398 0.456 0.011 Beta 1.00 1.21 0.89 1.41 1.25 0.00 Firm Y has a Debt/Equity Ratio of 0.75 and a Tax Rate of 20%, while Firm Z has a Debt/Equity Ratio of 0.25 and a Tax Rate of 20%. Which of the following statements is true, concerning the two firms’ leverage and sensitivity? Multiple Choice The levered sensitivity of Firm Z is higher than that of Firm Y, although the unlevered sensitivity of Firm Z is lower than that of Firm Y Both the levered and unlevered sensitivity of Firm Z are higher than those of Firm Y Both the levered and unlevered sensitivity of Firm Z are lower than those of Firm Y There is not enough information to determine the two firms' leverage and sensitivity The unlevered sensitivity of Firm Z is higher than that of Firm Y, although the levered sensitivity of Firm Z is lower than that of Firm Y
Dividend Valuation
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Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
Review the excerpted table of historic returns shown below. The returns have all been annualized after having calculated monthly returns for the previous ten years. In addition, information is provided about the average, the volatility, and the sensitivity of the possible investments.
|
Time Period # |
Market Return |
Firm W |
Firm X |
Firm Y |
Firm Z |
T-Bill |
|
1 |
0.333 |
0.191 |
0.218 |
0.955 |
0.601 |
0.035 |
|
2 |
-0.144 |
-0.423 |
-0.632 |
-0.747 |
-0.472 |
0.039 |
|
3 |
0.143 |
0.348 |
0.470 |
0.379 |
0.378 |
0.040 |
|
4 |
0.316 |
0.871 |
0.868 |
-0.192 |
0.502 |
0.036 |
|
5 |
0.178 |
0.912 |
0.499 |
0.694 |
0.364 |
0.036 |
|
6 |
-0.014 |
0.532 |
0.168 |
-0.671 |
-0.064 |
0.038 |
|
… |
… |
… |
… |
… |
… |
… |
|
… |
… |
… |
… |
… |
… |
… |
|
119 |
0.374 |
0.556 |
1.014 |
0.023 |
0.698 |
0.037 |
|
120 |
0.173 |
0.547 |
0.092 |
0.658 |
0.222 |
0.036 |
|
Average Return |
0.082 |
0.113 |
0.067 |
0.167 |
0.121 |
0.029 |
|
Standard Deviation |
0.156 |
0.369 |
0.497 |
0.398 |
0.456 |
0.011 |
|
Beta |
1.00 |
1.21 |
0.89 |
1.41 |
1.25 |
0.00 |
Firm Y has a Debt/Equity Ratio of 0.75 and a Tax Rate of 20%, while Firm Z has a Debt/Equity Ratio of 0.25 and a Tax Rate of 20%.
Which of the following statements is true, concerning the two firms’ leverage and sensitivity?
Multiple Choice
-
The levered sensitivity of Firm Z is higher than that of Firm Y, although the unlevered sensitivity of Firm Z is lower than that of Firm Y
-
Both the levered and unlevered sensitivity of Firm Z are higher than those of Firm Y
-
Both the levered and unlevered sensitivity of Firm Z are lower than those of Firm Y
-
There is not enough information to determine the two firms' leverage and sensitivity
-
The unlevered sensitivity of Firm Z is higher than that of Firm Y, although the levered sensitivity of Firm Z is lower than that of Firm Y
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