You are asked to respond to the following independent questions on Stock Valuati

Question

You are asked to respond to the following independent questions on Stock Valuation and Risk. Clearly state any assumptions you make in your response, and show all workings where necessary. Q1 Office Pro, a producer of office furniture, is looking to diversify its portfolio, and you have been asked to evaluate the risk and return of two assets (Pepsi and Coca Cola) which it is considering for its asset portfolio. You checked online for the company’s financial statements and found the following historical data for the two assets for the past ten years. Pepsi (Beta 0.9) Coca Cola (Beta = 1.5) Year Dividends paid ($) Opening Value ($) Closing Value ($) Dividends paid ($) Opening Value ($) Closing Value ($) 2007 2,200 20,000 22,000 1,000 25,000 25,000 2008 2,100 22,000 21,000 800 24,000 25,000 2009 2,000 21,000 24,000 700 23,000 24,000 2010 2,000 24,000 22,000 800 23,000 23,000 2011 1,700 22,000 23,000 900 22,000 22,000 2012 1,700 23,000 26,000 1,000 21,000 22,000 2013 1,600 26,000 26,000 1,200 21,000 21,000 2014 1,500 25,000 24,000 1,000 20,000 21,000 2015 1,400 24,000 25,000 1,600 20,000 20,000 2016 1,000 27,000 28,000 1,600 20,000 20,000 You believe that the past years are a good indicator of the future performance of the assets and the assets risks can be assessed on a standalone basis using standard deviation and coefficient of variation and as a part of Office Pro’s existing portfolio of assets using the Capital Asset Pricing Model (CAPM). Your Manager, has asked you to prepare a report which will assist in making a decision for Office Pro. The following are some of the highlights of your report, assuming the market has a risk-free rate of 4 percent and the return on the market is 8 percent: a) The Rate of Return for each Asset per year for 2007 to 2016.

Explanation / Answer

Pepsi Year Divinded paid Opening Value Closing Value Return (X) (X- X') (X - X' )^2 Return % for each year A B C D = (C-B+A)/B 2007 2200 20000 22000                                             0.210                       0.102         0.010 21.0% 2008 2100 22000 21000                                             0.050                    (0.058)         0.003 5.0% 2009 2000 21000 24000                                             0.238                       0.130         0.017 23.8% 2010 2000 24000 22000                                                    -                      (0.108)         0.012 0.0% 2011 1700 22000 23000                                             0.123                       0.015         0.000 12.3% 2012 1700 23000 26000                                             0.204                       0.096         0.009 20.4% 2013 1600 26000 26000                                             0.062                    (0.047)         0.002 6.2% 2014 1500 25000 24000                                             0.020                    (0.088)         0.008 2.0% 2015 1400 24000 25000                                             0.100                    (0.008)         0.000 10.0% 2016 1000 27000 28000                                             0.074                    (0.034)         0.001 7.4% Total Sum                                             1.081         0.063 Average (X')                                             0.108 Standard Deviation ((X-X')^2/N-1)^0.5         0.084 Coeffcient of variation Standard Deviation/x'*100      77.397 Return as per CAPM Risk Free Rate + Beta (Expected Market return - Risk Free rate) 4% + .9 (8%-4%) 7.60% As per the CAPM, the Return should be 7.6%, but Pepsi has given a average return on 10.8% over the past 10 years, with a standard deviation of 8.4% and coeffient of variation of 77.397 Coca Cola Year Divinded paid Opening Value Closing Value Return (X- X') (X - X' )^2 Return % for each year A B C D = (C-B+A)/B 2007 1000 25000 25000                                             0.040                    (0.033)         0.001 4.0% 2008 800 24000 25000                                             0.075                       0.002         0.000 7.5% 2009 700 23000 24000                                             0.074                       0.001         0.000 7.4% 2010 800 23000 23000                                             0.035                    (0.038)         0.001 3.5% 2011 1000 21000 22000                                             0.095                       0.022         0.000 9.5% 2012 1000 21000 22000                                             0.095                       0.022         0.000 9.5% 2013 1200 21000 21000                                             0.057                    (0.016)         0.000 5.7% 2014 1000 20000 21000                                             0.100                       0.027         0.001 10.0% 2015 1600 20000 20000                                             0.080                       0.007         0.000 8.0% 2016 1600 20000 20000                                             0.080                       0.007         0.000 8.0% Total Sum                                             0.731         0.005 Average (X')                                             0.073 Standard Deviation ((X-X')^2/N-1)^0.5         0.023 Coeffcient of variation Standard Deviation/x'*100      30.987 Return as per CAPM Risk Free Rate + Beta (Expected Market return - Risk Free rate) 4% + 1.5 (8%-4%) 10.00% As per the CAPM, the Return should be 10%, but Coca Cola has given a average return on 7.3% over the past 10 years, with a standard deviation of 2.3% and coeffient of variation of 30.987 So , in conclusion Pepsi has performed better than coca cola , and given more return than what is calculated by CAPM, but with a higher standard deviation comapred to Coca Cola, but in future it is recommended to go for Pepsi in the portfolio, than Coca Cola, which has given less return.

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.