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& Cha'ter (( an$ (3
Cha'ter (()Stock *aluation an$ +ik". #he price-ear%i%g&
'aluatio% metho( applie& the )))) price-ear%i%g& ratio to
)))) ear%i%g& per &hare i% or(er to 'alue the *irm+&
&tock.a. *irm+&, i%(u&try-. *irm+&, *irm+&c.
a'erage i%(u&try, i%(u&try(. a'erage i%(u&try,
*irm+& .. / *irm i& e0pecte( to ge%erate ear%i%g& o*
1.... per &hare %e0t year. #he mea% ratio o* &hare price to
e0pecte( ear%i%g& o* competitor& i% the &ame
i%(u&try i& "5. 2a&e( o% thi& i%*ormatio%3 the
'aluatio% o* the *irm+& &hare& -a&e( o% the
price-ear%i%g& 4567 metho( i&a. 1.....-. 1!.7!.c. 133.30.(.
%o%e o* the a-o'e 3. #he 56 metho( to &tock 'aluatio% may
re&ult i% a% i%accurate 'aluatio% *or a *irm i* error& are
ma(e i% *oreca&ti%g the *irm+& *uture ear%i%g& or i%
choo&i%g the i%(u&try compo&ite u&e( to (eri'e the
56 ratio.a. #rue-. Fal&e . 2olwork I%c. i& e0pecte( to pay
a (i'i(e%( o* 15 per &hare %e0t year. 2olwork+&
(i'i(e%(& are e0pecte( to grow -y 3 perce%t a%%ually. #he
re8uire( rate o* retur% *or 2olwork &tock i& "5 perce%t.
2a&e( o% the (i'i(e%( (i&cou%t mo(el3 a *air 'alue *or
2olwork &tock i& 1)))) per &hare.a. 33.33-. "!!.!7c.
".!7(. !0.00 5. 5rot&ky I%c. 9u&t pai( a (i'i(e%( o* 1...0
per &hare. #he (i'i(e%( growth rate *or
5rot&ky+&(i'i(e%(& i& 3 perce%t per year. I* the
re8uire( rate o* retur% o% 5rot&ky &tock i& ".
perce%t3the &tock &houl( -e 'alue( at 1)))) per &hare
accor(i%g to the (i'i(e%( (i&cou%t mo(el.a. ..-. .5.":c.
":.::(. 75.53 !. #he limitatio%& o* the (i'i(e%( (i&cou%t
mo(el are more pro%ou%ce( whe% 'alui%g &tock&a. that pay
mo&t o* their ear%i%g& a& (i'i(e%(&.-. that retai%
mo&t o* their ear%i%g&.c. that ha'e a lo%g hi&tory o*
(i'i(e%(&.(. that ha'e co%&ta%t ear%i%g& growth. 7.
;a%&el I%c. retai%& mo&t o* it& ear%i%g&. #he
compa%y curre%tly ha& ear%i%g& per &hare o* 1"".
;a%&el e0pect& it& ear%i%g& to grow at a
co%&ta%t rate o* . perce%t per year. Furthermore3 the a'erage
56 ratio o* all other *irm& i% ;a%&el+& i%(u&try
i& ".. ;a%&el i& e0pecte( to pay (i'i(e%(& per
&hare o* 13.50 (uri%g each o* the %e0t three year&. I*
i%'e&tor& re8uire a "0 perce%t rate o* retur% o% ;a%&el
&tock3 a *air price *or ;a%&el &tock to(ay i&
1)))).a. ""3.Ba. 5.. perce%t-. "".7 perce%tc. "!.7
perce%t(.perce%te. "0.. perce%t .5. /ccor(i%g to the te0t3 other
thi%g& -ei%g e8ual3 &tock price& o* @.S. *irm&
primarily i%'ol'e( i% e0porti%g coul( -e )))) a**ecte( -y a weak
(ollar. Stock price& o* @.S. importi%g *irm& coul( -e ))))
a**ecte( -y a weak (ollar.a. a('er&ely, *a'ora-ly-. *a'ora-ly,
a('er&elyc. *a'ora-ly, *a'ora-ly(. a('er&ely, a('er&ely
.!. #he (ema%( -y *oreig% i%'e&tor& *or the &tock o* a
@.S. *irm &ol( o% a @.S. e0cha%ge may -e higher whe% the (ollar
i& e0pecte( to ))))3 other thi%g& -ei%g e8ual.
4/&&ume the *irm+&operatio%& are u%a**ecte( -y the
'alue o* the (ollar.7a. &tre%gthe%-. weake%c. &ta-ilize(. 2
a%( = .7. / higher -eta o* a% a&&et re*lect&a. lower
ri&k.-. lower co'aria%ce -etwee% the a&&et+&
retur%& a%( market retur%&.c. higher co'aria%ce -etwee% the
a&&et+& retur%& a%( the market retur%&.(. %o%e
o* the a-o'e .:. #he CAa%uary e**ectC re*er& to a largea.
ri&e i% the price o* &mall &tock& i% Aa%uary.-.
(ecli%e i% the price o* &mall &tock& i% Aa%uary.c.
(ecli%e i% the price o* large &tock& i% Aa%uary.(. ri&e
i% the price o* large &tock& i% Aa%uary. .orga% &tock
ha& a% a'erage retur% o* "5 perce%t3 a -eta o* ..53 a%( a
&ta%(ar( (e'iatio% o* retur%& o* .0 perce%t. #he #rey%or
i%(e0 o* >orga% &tock i&a. 0.0.-. 0.05.c. 0.35.(.
0.03.e. %o%e o* the a-o'e 3. Dilo &tock ha& a% a'erage
retur% o* "5 perce%t3 a -eta o* ..53 a%( a &ta%(ar( (e'iatio%
o* retur%& o* .0 perce%t. #he Sharpe i%(e0 o* Dilo &tock
i&a. 0.3!.-. 0.35.c. 0..:.(. 0.5.e. %o%e o* the a-o'e 35.
Sor'i%o =o. i& e0pecte( to o**er a (i'i(e%( o* 13.. per
&hare per year *ore'er. #he re8uire(rate o* retur% o% Sor'i%o
&tock i& "3 perce%t. #hu&3 the price o* a &hare o*
Sor'i%o &tock3 accor(i%g to the (i'i(e%( (i&cou%t mo(el3
i& 1)))).a. .0!-. ."!c. 0.!3(. ..!.e. %o%e o* the a-o'e 3!.
Ea%(le &tock 9u&t pai( a (i'i(e%( o* 1.7! per &hare a%(
pla%& to pay a (i'i(e%( o* 15 per &hare %e0t year3 which
i& e0pecte( to i%crea&e -y 3 perce%t per year
&u-&e8ue%tly. #he re8uire( rate o* retur% i& "5
perce%t. #he 'alue o* Ea%(le &tock3 accor(i%g to the (i'i(e%(
(i&cou%t mo(el3 i& 1)))).a. 3u%icipal 2o%( I%(e0(.
&elli%g, a >u%icipal 2o%( I%(e0 .7. #he %et gai% or
lo&& o% a *uture& co%tract *or a &tock i%(e0 that
i& %ot clo&e( out i& -a&e( o% the (i**ere%ce
-etwee% the *uture& price whe% the i%itial po&itio% wa&
create( a%( the *uture& price ata. the &ettleme%t (ate.-.
the (ate at which the *uture& price reache& it&
ma0imum.c. the (ate at which the *uture& price reache&
it& mi%imum.(. the (ate three mo%th& -eyo%( the (ate whe%
the i%itial po&itio% wa& take%. .:. #he 'alue o* a% SO5 500
*uture& co%tract i& 1500 time& the i%(e0.
/&&ume the *uture& price o% the SO5 500 i%(e0 i&
"!". at the time o* purcha&e. I* the i%(e0 price i&
1"!"< whe% the po&itio% i& clo&e( out3 the gai%
i&a. 1700.-. 173000.c. 133"arket-. Fi8ui(ityc. =re(it(.
2a&i&e. No%e o* the a-o'e 3. #ra(i%g re&trictio%&
impo&e( o% &peci*ic &tock& or &tock i%(ice&
are re*erre( to a&a. i%(e0 -u&ter&.-. i%(e0
optio%&.c. circuit -reaker&.(. protecti'e co'e%a%t&.
35. Fi%a%cial le'erage3 whe% u&e( i% a&&ociatio% with a
*uture& co%tract3 )))) the po&iti'e retur%& a%( ))))
lo&&e&.a. mag%i*ie&, re(uce&-. re(uce&,
mag%i*ie&c. mag%i*ie&, mag%i*ie&(. re(uce&,
re(uce& 3!. =urre%cy *uture& may -e purcha&e( to he(ge
)))) or to capitalize o% the e0pecte( )))) o* that curre%cy
agai%&t the (ollar.a. recei'a-le&, appreciatio%-.
recei'a-le&, (epreciatio%c. paya-le&, (epreciatio%(.
paya-le&, appreciatio% 37. #he ri&k that the po&itio%
-ei%g he(ge( -y a *uture& po&itio% i& %ot a**ecte( i%
the &ame ma%%er a& the i%&trume%t u%(erlyi%g the
*i%a%cial *uture& co%tract3 i& re*erre( to a&a. market
ri&k.-. li8ui(ity ri&k.c. (e*ault ri&k.(. -a&i&
ri&k. 3:. Ly%amic a&&et allocatio% i%'ol'e& the
&witchi%g -etwee% ri&ky a%( low-ri&k
i%'e&tme%t& -y i%&titutio%al i%'e&tor& o'er
time i% re&po%&e to cha%gi%g e0pectatio%&.a. #rue-.
Fal&e 3