MPF 753/953 Trimester 3 2011Assignment 2: Finance Project
2012-01-07 21:38:21   来源：   评论：0 点击：

The due date for this assignment is Monday, January 16, 2012. Late assignment
will not be accepted. You can do the assignment individually or in group of two
students.
In this assignment, you are required to estimate the cost of equity using the dividend discount
model (DDM) and the capital asset pricing model (CAPM). Choose …ve companies with the
following characteristics:
 currently traded on the Australian stock market,
 have been in operation for at least seven years,
 have been paying dividends for at least 7 years,
 each must come from a distinct sector, e.g. Banking and Finance, Mining and Manu-
facturing, Retail, Tourism & Hospitality and Transport, etc. No two companies should
come from the same industry.
Having chosen the companies, go to au.…nance.yahoo.com to download their monthly stock
prices (adjusted), their dividends, and the monthly S&P/ASX 200 Index for the last 7 years.
DDM Approach
If a company pays dividends twice in a year then aggregate them to get the annual dividend.
Using the past dividend information you then compute a dividend growth rate. This growth
rate is used as a “proxy”for the constant growth rate in the “Dividend Discount Model”(the
underlying theory will be covered in the …rst few weeks of the course). How you estimate the
growth rate is your choice. You must however clearly explain and justify whatever estimation
technique you adopt. For example, you could compute the growth each year and take the
average. This is only a suggestion –you are strongly encouraged to explore other methods
for estimating the growth rate. Given the growth rate, you can estimate the cost of equity.
CAPM Approach
Beta is often estimated by linear regression, based on the market model:
Rt = + Rmt + t;
where Rt is the return of the stock at time t, Rmt is the return of the market portfolio (the
S&P/ASX 200 Index) at time t.
1. Compute the monthly rate of return of each stock and the S&P/ASX 200 Index. Then
annualize the rates of returns
2. Estimate beta for each company.
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3. Calculate the average rate of return of S&P/ASX 200 Index and use it as a proxy for
the market expected return.
4. Using the interbank rate of 4:75% as a proxy for risk free rate, calculate the cost of
equity for each company.
How you will be assessed
This assignment is worth 20 marks. You need to submit a written report up to 2000 words
(excluding tables, …gures and references) that clearly explains your procedure for estimating
both approaches. Your report should be in MS Word format (Times New Roman font size
12, single-spaced). All …gures and tables should be clearly labelled and embedded within the
body of the report as MS Excel objects –DO NOT SUBMIT SEPARATE EXCEL FILES.
You must include a comprehensive list of references for both your data sources as well as
citations. You are permitted to use any standard academic referencing style but you must
be consistent. The report must include:
1. The names and the seven years’price and dividend payout data of the …ve companies
you choose to evaluate and the S&P/ASX 200 Index. [Remember to cite all sources
for your data] (3 marks)
2. The annual dividend time series for each company. (1 mark)
3. A description and justi…cation of the estimation technique you use to obtain the proxy
constant growth rate in the DDM approach. What is the growth rate of each company?
(4 marks)
4. The annualized return time series of …ve stocks and the S&P/ASX 200 (1 mark)
5. The cost of equity using DDM for each company? What are disadvantages of this
method? (2 marks)
6. The estimated betas for …ve companies. What do they tell you about the risk of these
companies? (3 marks)
7. The cost of equity using CAPM for each company (3 marks)
8. Compare the results from both methods. Which method would you recommend for
each company? Explain.(3 marks)
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