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1.Complete a DCF analysis on AT&T (ticker symbol T) .2.Complete a DDM analysis on AT&T.Upload one Excel file which contains a separate worksheet for each analysis. Briefly explain your assumptions for the parameters to be used in the models, such as k or g.Please use the DCF and DDM model based on the PPT I upload,and search the AT&T data by yourself.(You can download 10-k or other reports on https://www.sec.gov/edgar/searchedgar/companysearch.html?
lecture_8.pptx

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Investment Analysis and
Portfolio Management
Section A1
Term Project
Stock report on the stock you have been assigned in the beginning of the
semester, including:
• Description of the company, including its industry, position in the market,
competitors, headwinds and tailwinds, management, etc.
• Determine Beta with the Capital Asset Pricing Model
• Valuation using DCF or DDM, estimating a low, medium, and high share
value (depending on your assumptions which you need to justify in your
writeup)
• Statement of risks
• Given three investor profiles, explain the suitability of an investment in
“your” stock for these investors.
Valuation by Comparables
• Compare valuation ratios of firm to industry averages.
• Ratios like price/sales are useful for valuing start-ups that have yet to
generate positive earnings.
Review: Capital Asset Pricing Model
• Expected excess return should account for risk of the security.
• Beta describes the sensitivity of a security to the market:
E 𝑟𝑖 − 𝑟𝑓 = 𝛽(E 𝑟𝑚 − 𝑟𝑓 )
• Large beta: Aggressive or cyclical stocks
• Low beta: Defensive stocks
• Negative beta: Stock moves opposite to the market.
What is beta? Result of a regression, and it means 𝛽 =
Cov 𝑟𝑖 ,𝑟𝑚
Var 𝑟𝑚
.
Market capitalization rate
• Once we know beta, and assuming CAPM is true, we know the
required return for a stock to hold it in our portfolio:
𝑘 = 𝛽 E 𝑟𝑚 − 𝑟𝑓 + 𝑟𝑓
• If the stock is priced correctly, k should equal expected return.
• k is called the market capitalization rate.
Fundamental analysis
• Fundamental analysis models a company’s value by assessing its
current and future profitability.
• The purpose of fundamental analysis is to identify mispriced stocks
relative to some measure of “true” value derived from financial data.
How?

Balance Sheet Models
Dividend Discount Models (DDM)
Price/Earnings Ratios
Free Cash Flow Models
Financial Statements
• Income Statement:
• Profitability over time
• Balance Sheet:
• Financial condition at a point in time
• Statement of Cash Flows:
• Tracks the cash implications of transactions.
Income Statement
Balance Sheet
Cash Flow Statement
Accounting?!
Economic earnings
• Sustainable cash flow that can be paid to stockholders without
impairing productive capacity of the firm
Accounting earnings
• Affected by conventions regarding the valuation of assets
Benchmarking – consider comparable figures
• Compare the company’s ratios across time.
• Compare ratios of firms in the same industry.
• Cross-industry comparisons can be misleading.
Other comparability problems
• Accounting Differences
• Inventory Valuation
• Depreciation
• Inflation and Interest Expense
• Fair Value Accounting
• Quality of Earnings
• International Accounting Conventions
Intrinsic value
• The intrinsic value (IV) is the “true” value, according to a model.
• The market value (MV) is the consensus value of all market
participants