VALUE MEASUREMENT
INTRODUCTION
The purpose of this report is to understand the Canadian stock market and valuing stock prices of the following six Canadian companies: Bank of Montreal, Toronto-Dominion Bank, Canadian Tire, Sears, Husky Energy, and Petrol Canada. We have used ten years of data to examine the prices of these six Canadian companies under the Security Market Line theory. The stock prices of these companies have been taken from Yahoo finance and MSN finance. The simple linear regression method was used to calculate risk premium and beta.
Bank of Montreal (BMO)
BMO Financial Group is one of the largest financial services providers in North America, offering comprehensive retail banking, wealth management and investment banking products, services and solutions.
According to the TSX historical data obtained from Yahoo Finance, the arithmetic method was used to average the returns of BMO stock at 5.19% (Exhibit 1) based on semi-annual prices during the 10-year period. The same method was also implemented to calculate the average of compensation prices of 4.02% (Exhibit 1). Besides the simple linear regression offered, the way of calculating beta, which equaled 0.5177 (Exhibit 1) less than 1, indicated the relatively low risk to the markets. Alpha 0.0311 (Exhibit 1) was also brought out after the entry of the point (4.02%, 5.19%) to the linear function y=a + 0.5177x (Exhibit 1). In addition, according to the formula RRR (Required Rate of Return), we could easily get the average RRR of BMO which is 3.58%.
Above all, compared to the average return of BMO, it was obvious that the RRR, 3.58% was lower than the average stock return on the TSX market, 5.19%. Therefore, the value of BMO stock was undervalued, which meant the benefit for investors gained was higher than their expectation.
Toronto-Dominion Bank
Toronto-Dominion Bank is the personal, small business and commercial banking operation of the Toronto-Dominion Bank offering a range of financial products and services to over 10 million customers throughout Canada through more than 1000 branches and 2700 ATMs.
From 1997 to 2007, the average returns of the TD stock were calculated as 6.22% (Exhibit 2) based on the semi-annual prices. Since both BMO and TD were from the TSX market, the average return on compensation should be treated as the same as the result we retrieved for BMO, 4.02% (Exhibit 2). Moreover, the beta of TD was 0.6757 (Exhibit 2) less than 1 but very similar to data of BMO 0.5177 which also demonstrated the lower risk than the average of the Market.
The Montreal Stock Exchange was incorporated in the year 1874, but as early as 1832 a group of brokers met regularly to trade stocks within a coffee house which was later named the “Exchange Coffee House”. In 1863, a Board of Brokers was formed which soon grew into a regulated body with a membership subject to election. In 1974, The Montreal Stock Exchange merged with the Canadian Stock Exchange, and a year later becomes the first to sell stock options to Canada. The Montreal Stock Exchange in 1982 officially changes its name to Montréal Exchange in order to reflect the growing importance of financial instruments other than stocks which primarily include options and futures – on its trading floor. By 1986 the number of new listings at the MX
Following the Global Financial Crisis (GFC) of 2009 BlueScope was in its worst ever market position. As of 2011 the price of shares had hit record lows of 38c compared to $12.03 of just three years earlier, showing a 93% reduction in share prices. Huge financial losses were also recorded. In the 2010/2011 financia...
Grand Metropolitan PLC is the world’s largest wine and spirits seller. It mainly operated in London, USA. In 1991, it beats market expectation with a 4.8% increase in pretax profits, and the company Chairman stated that company’s goal “to constantly improve on”. Despite the great performance in the world recession in 1991, the price of GrandMet shares was 10% below the average price/earnings ratio of the companies in the Standard & Poor’s 500 index. And more important, rumors had that GrandMet, valued at more than $14 billion in the stock market, maybe a takeover target. The management dilemma is to understand why the company’s stock is traded below of what considered being the right price and whether the company is truly being undervalued by the market or there are consistent issues with negative NPV projects and lines of businesses.
The stock price is currently 103.31, down from a recent high of 121.50. The P/E ratio is declining at 28 and beta at .67, which is expected to grow closer to 1.0. A recent earnings surprise last December yielded a 15% difference from the lower expectations and the latest earnings reports late last month also surprised investors. Estimates for the 2000 fiscal year are being raised by a large majority of analyst who believe that earnings per share will increase and the stock price will reach close to 150.
Ross, S.A., Westerfield, R.W., Jaffe, J.F., & Roberts, G.S (2001) Corporate Finance. 3 th ed.Toronto, McGraw-Hill Ryerson.
The estimates of cost of capital for equity 6.14% are making by using the capital asset pricing model (CAPM) to generate forecast of DDM and RIM. This method is defined by the sum of risk free rate plus beta that multiplied with a risk premium. Particularly, the beta, which is a quantitative measure of the volatility of company stock relative to the unstable of the overall market, found in JB HI-FI case at 0.56 (JB HI-FI financial statement 2016). It
A very slim minority of firms distribute dividends. This truism has revolutionary implications. In the absence of dividends, the foundation of most - if not all - of the financial theories we employ in order to determine the value of shares, is falsified. These theories rely on a few implicit and explicit assumptions:
Toronto-Dominion bank Introduction According to the Toronto-Dominion Bank (TD) corporate profile, The Toronto-Dominion bank was formed on February 1, 1995 through the amalgamation of The Bank of Toronto and The Dominion Bank. The Toronto-Dominion bank and its subsidiaries are collectively known as TD Bank Group that offers a full range of financial products and services through the Canadian retail, US retail and wholesale banking. Canadian retail includes TD Canada Trust, Business Banking, TD Auto Finance(Canada), TD Wealth(Canada), TD Direct Investing, TD Insurance. US retail includes TD bank, American’s most convenient bank, TD auto finance(US), TD health (US) and TD investment in TD Ameritrade.
Ross, S.A., Westerfield, R.W., Jaffe, J. and Jordan, B.D., 2008. Modern Financial Management: International Student Edition. 8th Edition. New York: McGraw-Hill Companies.
William Sharpe, Gordon J. Alexander, Jeffrey W Bailey. Investments. Prentice Hall; 6 edition, October 20, 1998
Capital Asset Pricing Model (CAPM) is an ex ante concept, which is built on the portfolio theory established by Markowitz (Bhatnagar and Ramlogan 2012). It enhances the understanding of elements of asset prices, specifically the linear relationship between risk and expected return (Perold 2004). The direct correlation between risk and return is well defined by the security market line (SML), where market risk of an asset is associated with the return and risk of the market along with the risk free rate to estimate expected return on an asset (Watson and Head 1998 cited in Laubscher 2002).
Barclay’s group practices integrated global banking that which serves their clients and customers and also optimizing risk adjusted for their shareholder returns. In this case, it moves, protects and invests money for over 38 million customers and clients globally. This group is the third largest in the world in assets and in terms of financial provider provision all over the world with a core tier one ratio of 11 per cent (Barclays PLC SWOT Analysis, 2013). In the UK, it is the third largest on the market capitalization, with its headquarters at Churchill in London, England.
On 9/8/02 Inuit, Inc had an Alpha rating of .0084 indicating it was performing better than previously estimated. Intuit also had a Beta rating of .24 indicating its volatility had decreased. This beta indicates that the company could possibly increase or decrease .76% less than the index. Due to this small Beta, Intuit is of relatively low risk as it is independent of the motion of the index. Inuit has a Relative Performance Rating of 53.81. This stock overperforms the NASDAQ 100 INDEX by 53.81 %. Intuit has gained 7.29% since December 31.
4. Harry Davis’s common stock is currently selling at $50 per share. Its last dividend (D0) was $4.19, and dividends are expected to grow at a constant rate of 5% in the foreseeable future. Harry Davis’s beta is 1.2, the yield on T-bonds is 7%, and the market risk premium is estimated to be 6%. For the bond yield plus risk premium approach, the firm uses a 4% point risk premium.