Assignment overview

You are to present a proposal that specifically meets the requirements of case assigned. Your proposal should be from 4 – 6 pages not including title page, reference section or appendix material, double spaces formatted with Times Roman 12 pt. You should begin the finished presentation with a title page.  The Case Study must follow APA rules in structure and presentation.

While your Case Study should be presented in written narrative format it is expected that appropriate charts, graphs and tables maybe a part of your presentation.  The charts, graphs and tables should, however, be included as appendix material and appropriately referenced within the body of your Case Study material. Do not include the charts, graphs and tables within the body of your presentation directly. 

Case assigned: FRED ALBERTS, ROOKIE

FRED’S ACCOUNT

Fred pressed the ‘return’ key, carrying out the trades he had figured would give him a good return. He had opened the online stock trading account in order to learn about the process of trading and to take advantage of his academic knowledge of how the markets determine stock values. He had taken several finance classes in his undergraduate degree, and had enjoyed learning the way investors decide how much to bid on stocks. Fred figured he could take advantage of this knowledge in creating more wealth than he could if he just invested in an investment fund.

THE BROKER’S ADVICE

When he opened the trading account, Fred had signed up for telephone access to a broker. The account allowed him a certain number of calls and a certain amount of time in consultation with the broker each month. Now, Fred had quite a sum of free cash in the account, money he had transferred from an investment fund that he was not very happy with. The amount he had to invest was about $68,000. He decided to take advantage of the advisement service, and made his first telephone call.

“Welcome to Bettertrade services, Mr. Alberts. My name is Brad Cendron. How can I assist you today?”, the voice asked.

“Yes; I would like to get your advice on how to invest a sum of money. My objective is to invest this amount in stocks that appear to be undervalued by the market. Can you recommend about ten stocks that would fit that description?”, Fred asked.

“Oh, yes, I’d be happy to. We have listed our top bargains on the “top stock picks” list on the website. Are you online now?”, Brad asked.

“Yes, I am,” Fred replied. “Oh, I see it here. They are in order, according to your idea of how much of a bargain they are, right?”

“That’s correct, Mr. Albert. We believe that these 20 stocks are going to have greater upside potential over time. I can help you make the transactions, if you’d like.”

“Well, I’m going to do a little more research on my own first, but thank you for the link. I’ll just carry out transactions via the website, since the transaction fees are lower that way,” Fred said.

“OK, Mr. Albert,” Brad replied. Let us know if you have other questions, or if we can assist you further.”

Fred printed out the list of stocks, and set about the task of collecting information about them. He went to the “market data” link on the company’s website to get some information. For each firm, he downloaded the history of dividend payments, and the beta. He also downloaded current treasury bond rates and the rate of return on a broad market index, which he would use as an indicator of the market return. Fred summarized the information and prepared to determine the value of the stocks according to the financial models he had studied in college.

Fred’s collection of information and the current market prices of the stocks in the “top stock picks” list from his broker appear in Exhibits 1, 2, and 3 (attached).

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REQUIRED

1. For each stock listed, calculate the required return as indicated by the Capital Asset Pricing Model (CAPM).

2. Calculate the value of each stock share using the constant growth formula.

3. Compare the values you calculated to each of the market prices for the top twenty stock picks. Are your calculations close approximations of the market prices? Why do you think there are differences?

4. What are the implications of your analysis to Fred’s choice of stocks?

5. Think about your results in terms of claims of market efficiency. On average, over the long term, do you think that the models you used to calculate the stock values really works? Why or why not?

6. In light of your answer in number 5 above, how would you advise Fred?

 

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