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Questions for Modules 2& 3

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Question;You recently learned in FIN 602 how to value stocks using the P/E multiples approach, constant dividend growth model, and corporate valuation model. On February 15, 2013, you tuned into CNBC financial TV channel and watch different security analysts discussing the current valuations of Apple, Google, WellsFargo, and Bank of America. However, you are puzzled because these analysts couldnot agree on the current valuations and end-of-year price targets for these fourcompanies. For example, two analysts argued that Google and Bank o America arecurrently overvalued, while others reached the opposite conclusion. Their price targetsalso varied widely. Please solve this puzzle and explain how these analysts can reachsuch very different conclusions on stock valuations and price targets. You can assumethat all analysts are using the same three stock valuation approaches of chapters 7 and13. Limit your answers to no more than 10 sentences.Q#2 (Chapter 9). A diversified company has decided to use its overall firm WACC asa performance benchmark for rating its divisional managers and to decide whethernew projects from its three divisions should be funded for investment capital. Thefirm WACC is 12%. The divisional WACCs for its high risk, average risk, and lowrisk divisions are 16%, 11.9%, and 8%, respectively. Please explain the pros and consof using the firm WACC in evaluating its divisional managers and projects.Remember that WACC can be interpreted as a hurdle rate or the minimum acceptablereturn. Limit your answers to no more than 10 sentences.

 

Paper#50584 | Written in 18-Jul-2015

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