Home Depot, Inc. In The New Millenium
HOME DEPOT, INC. IN THE NEW MILLENNIUM
Question 1: Estimation of intrinsic value of Home Depot’s stock as of Feb 1, 2001
To simplify the question, let’s Supppose ROE of Home Depot Inc would be constant during the following years as 20%:
β=1.09
Re=Rf+β(ROE-Rf)=5.99%+1.09*6.5%=12.97%
By doing this we assume: the Market risk premium during 2001 would be 6.4%. Acctually, according to the lecturer, the risk premium during year 1998-2008 should be within the range of 4% to 8%. Therefore the assumption of 6.5% seems probable.
Abnormal earnings=Net Income – Shareholders’ Equity at the beginning of the year*Re=(20%-12.76%)BVE0=1086.3M
BVE0=15004M
Stock Value=BVE0+pv(AE)=15004M+1086.3/12.97%=23379.4M
So the intrinsic value of Home Depot’s stock of Feb 1, 2001 is 23379.4 millions …show more content…
✓ Investors’ expected utility is an increasing function of return and a decreasing function of risk (risk-aversion) ✓ Investors are
Question 1: Estimation of intrinsic value of Home Depot’s stock as of Feb 1, 2001
To simplify the question, let’s Supppose ROE of Home Depot Inc would be constant during the following years as 20%:
β=1.09
Re=Rf+β(ROE-Rf)=5.99%+1.09*6.5%=12.97%
By doing this we assume: the Market risk premium during 2001 would be 6.4%. Acctually, according to the lecturer, the risk premium during year 1998-2008 should be within the range of 4% to 8%. Therefore the assumption of 6.5% seems probable.
Abnormal earnings=Net Income – Shareholders’ Equity at the beginning of the year*Re=(20%-12.76%)BVE0=1086.3M
BVE0=15004M
Stock Value=BVE0+pv(AE)=15004M+1086.3/12.97%=23379.4M
So the intrinsic value of Home Depot’s stock of Feb 1, 2001 is 23379.4 millions …show more content…
✓ Investors’ expected utility is an increasing function of return and a decreasing function of risk (risk-aversion) ✓ Investors are