Equity Question

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shahravi123

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On January 1, 2008, Abel Moreno, CFO of Monterrey Mining & Metals (MMM), gathered the following data to determine the attractiveness of the company's common stock:

Dividends per share in 2001.........2 pesos
Dividends per share in 2007..........3 pesos
Expected return on the market...........17%
Expected nominal risk-free return.......9%
MMM�s beta......1.8
MMM share price, January 1, 2008........19 pesos

Based on the information gathered, MMM stock's intrinsic value and its attractiveness on January 1, 2008, respectively, were:

Stock's intrinsic value...............Stock's attractiveness
closest to:
A.18.29 pesos.................................Over-valued
B.18.29 pesos..............................Under-valued
C.19.57 pesos..........................Over-valued
D.19.57 pesos...............................Under-valued
 
use the growth rate in dividends to get an estimate of 'g'

use CAPM to get 'k'

use DDM to find the price of the stock, then compare it to 19 to see if it's over or underpriced
 
shahravi, where are you getting questions from?
a lot of your questions are real good.

Cross out, A and D.

Then take a guess between B and C.
 
thats a good strategy.

My frd...gave me a bunch fo questions...and told me go over all those for last week...
Some of the are for old/current sample or mock exams - I think.

Ia hve answers and explanations for some but not all....
 
tell your frnd to send these to me too.. pepphell at gmail.

as i am getting in 50's now my last chance of making one good look at every thing in the material is via these exams that you have cuz if i look at schweser exams ill go blind.. or kill myself, cuz their questions don't make sense to me.



Edited 1 time(s). Last edit at Tuesday, June 3, 2008 at 07:56PM by pepp.
 
find g: 3/2 = 1.5

1.5^(1/6) ~ 7%

last dividend = 3, next dividend = 3*1.07 = 3.21

CAPM r = 9+1.8(17-9) = 23.4%

price = 3.21/(0.234-0.07) = 19.57

19.57, market price is 19 ==> undervalued

C)
 
this is a good question to ask. But it takes way more than 90 seconds to me.
 
I have never seen G being computed the way you've done.
 
i think the answer to this is actually "D.19.57 pesos...............................Under-valued"

but everyone has been saying "C.19.57 pesos..........................Over-valued"

the feedback sheet says "The stock�s intrinsic value > price, so it is undervalued."

so all ya'll were wrong, but just make sure we get it right on the test.
 
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