RobertA

Which of the following actions will be least helpful for an analyst attempting to improve the predictive power of his scenario analysis?

A) Acquiring more precise inputs.

B) Limiting deviations from the core model.

C) Using a spreadsheet rather than a calculator.

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The whole point of scenario analysis is the flexibility to modify the inputs to see how changes in one factor affect others. In order to perform scenario analysis, you must deviate from the core model. Increased precision on the inputs will increase the predictive power of almost any model. Spreadsheets reduce the likelihood of computational inaccuracies and allow analysts to more easily modify models to reflect many scenarios.

RobertA

The current market price per share for High-on-the-Hog, Inc. is $52.50, and an analyst is using the Gordon Growth model to determine whether this is a fair price. The company paid a dividend of $3.00 last year on earnings of $4.50 a share. If the required rate of return is 11.00% and the expected grown rate in earnings and in dividends is 5%, the current market price is most likely:

A) correctly valued.

B) undervalued.

C) overvalued.

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The value per share using the estimates is $52.50 = [$3.00(1.05) / 0.11 − 0.05)].

RobertA

In its most recent quarterly earnings report, Smith Brothers Garden Supplies said it planned to increase its dividend at an annual rate of 5% for the foreseeable future. Analyst Anton Spears is using a required return of 9.5% for Smith Brothers stock. Smith Brothers stock trades for $52.17 per share and earned $3.01 per share over the last 12 months. The company paid a dividend of $2.15 per share during the last 12-month period, and its dividend-growth rate for the last five years was 9.2%. Using the Gordon Growth model, the share price for Smith Brothers stock is most likely:

A) correctly valued.

B) overvalued.

C) undervalued.

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The Gordon Growth model is as follows:
Value = [dividend × (1 + dividend growth rate)] / [required return − growth rate]

Value	= [2.15 × 1.05] / [0.095 − 0.05]
	= 2.2575 / [0.095 − 0.05]
	= 50.17

RobertA

The current market price per share for Burton, Inc. is $33.33, and an analyst is using the Gordon Growth model to determine whether this is a fair price. The company paid a dividend of $2.00 last year on earnings of $2.50 a share. If the required rate of return is 12.00% and the expected grown rate in earnings and in dividends is 6%, the current market price is most likely:

A) correctly valued.

B) undervalued.

C) overvalued.

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The value per share using the estimates is $35.33 = [$2.00(1.06) / 0.12 − 0.06)]. This is higher than the current share price.