FINA 6630 Project, Summer 2020

Note well that individual submission is required for this project.

The objective of this project is to provide you an opportunity to explore a possible stock investment decision process based on our risk-return and stock valuation discussions. In your submission, please provide with requested analysis and/or information (mostly numbered in each part). While possible sources you can use are provided in parenthesis for any analysis and/or information, your writing should not be copy/paste of somebody else and rather a synthesis of all the information gathered from various sources. Also, make sure that your submission should read like a brief stock report to benefit your readers and use complete sentences wherever possible. Your project should be typed in single-spaced, 12 pts, and parts and numberings under each part should be used as given below.

Part 1. Estimating Expected Return

First, notice your case company’s ticker symbol in the following table.

Please include the following information in your project submission.

1) Case Company Name: ??

Case Company Stock Ticker: ??

2) i) The Business Description of the Case Company and ii) how does the company make money: ??

3) i) Explain Pros (Bulls) and Cons (Bears) on the case company stock (From Morningstar).

(Hint: You can access Morningstar (a database) at AUM website. At AUM home page, click “Library” tab on top. Click “Databases and Articles.” Click “M.” From the list, click “Morningstar Investment Research Center.” In the Morningstar web site, click “Companies” tab. Then in the search window, enter your case company’s ticker symbol and search. Choose the right ticker from the list of tickers that become available. Click “Stock Analysis” tab from the menu top across. Then click “bulls say and bears say” to see analysts’ different opinions on the case company. (Make sure that when you are done using Morningstar, please click “End Session” button on the upper right hand corner to allow other users to use the database.)

ii) Now google your case company’s stock ticker symbol and find information similar to “bulls say and bears say” and write summary of pros and cons of your case company’s stock in your own words. This part of your submission should include your overall evaluation of the case company’s possible future performance by referring to other websites such as Yahoo Finance, Marketwatch, Reuters etc.

iii) Determine and show probabilities of three possible business conditions (Good, Normal, Bad) of the company in the next 12 months based on evaluation of the information in i) and ii) above. These probabilities will be used in 5) below.

4) Provide Analysts’ Target Stock Prices (Low, Average, High)

(You can use Yahoo Finance for this part. In the “Quote Lookup” search window on the right hand side of Yahoo Finance home page (it is not the search window top across), enter the ticker symbol of your case company. Scroll down until you see “Analyst Price Targets” on the right hand side margin. There you should be able to see analysts’ low, average, and high target prices.)

5) Complete the following table by filling in the cell with alphabets A ~ N.

· Use analysts’ high, average, and low target prices you identified from Yahoo Finance as possible prices for E, F, and G.

· Probabilities for high, avg., and low prices (i.e., good, normal, and bad scenarios) should be assigned by you after reviewing opinions of bulls and bears and other sources in part iii) of 3) above. In other words, if you are optimistic about the case company’s future performance, you would assign higher probability to high price. If you are pessimistic about the case company’s future performance, you would assign higher probability to low price. (Note that sum of probabilities of good, normal, and bad should be exactly one: B+C+D = 1)

· Possible return is calculated as “(possible price – current stock price)*100/current price” for each possible price.

· Expected return (N) will be probability-weighted average of possible returns.

Part 2. Estimating the stock’s beta and required return

1) Run a linear regression to estimate the case company stock’s beta and copy/paste the regression result table. (Make sure your x variable should appear as market return (S&P 500 index return). You can do that by checking “labels” box in “Regression” window. “Regression” window appears about in 4 min 53 sec of the first Youtube video below.)

(Hint: To see how to run regression to estimate case company stock’s beta, watch the instructional video at https://www.youtube.com/watch?v=Byx4hQ0IRrM

You will need “Data Analysis” add-in to be able to run regression. To check whether your Excel has it, click “Data” tab and search for “Data Analysis” on the upper right hand corner. In case you do not see “Data Analysis” button in excel, go to http://libanswers.walsh.edu/faq/147605 to see how to add “Data Analysis.”)

2) Using calculated beta, Historical Market Risk Premium (=rM – rf) of 6% and Risk Free Interest Rate (rf) of 3% as described in CAPM, find Required Return (i.e., Fair Return) of your stock. Please start your writing of this part with SML (Security Market Line) for your case firm: rcase firm = rf + (rM – rf) x beta case firm. Then explain what the equation says about your case firm’s required return.

Part 3. Evaluating Stock’s Over- or Under- Pricing

1) Compare the estimated “expected return” in part 1 to the estimated “required return” in part 2 and explain whether the stock is over- or under-priced.

2) i) Provide analysts’ recommendation (buy, hold, sell) information (Yahoo Finance). Is your conclusion in 1) consistent with analysts’ buy/sell/hold recommendation found in Yahoo finance? Explain.

(Hint: In the “Quote Lookup” search window on the right hand side of yahoo finance home page (it is not the search window top across), enter the ticker symbol of your case company. Scroll down until you see “Recommendation Rating” on the right hand side margin. There you should be able to see analysts’ average recommendation.)

ii) By googling your case firm, find another analyst’s investment analysis article on your case firm. What is the analyst’s recommendation of your case firm’s stock? What are the reasons suggested to make the recommendation by the analyst?

3) Write a balanced conclusion by mentioning i) a short list of reasons to buy your case firm’s stock and ii) a short list of reasons to sell your case firm’s stock for the next 12 months period. Then make your own judgement on whether probability of one list dominates the other or they are equally likely for the next 12 months period.