***I will send over necessary documents***
Questions 1-3 should be answered using the FactSet data service as well as other sources such as the WRDS database, Yahoo Finance, or other finance-related web sites. You can use other sources beyond FactSet, WRDS, and Yahoo Finance but please cite all these additional sources in a bibliography. Question 4 is a conceptual question based on a media article which should be answered on a stand-alone basis.
If you want to refer to any tables or graphs in your responses, then please add them to the end of the document after Question 4’s response and label each item clearly (e.g., Exhibit 1.A. for the first graph/table for Question 1; Exhibit 2.C for the third graph/table for Question 2, etc.).
Chosen Stock: Microsoft (MSFT)
Question 1. Using fundamental analysis, do you think your chosen stock (MSFT) is over-, under-, of fairly valued at its cu
ent stock price?
In supporting your
ief, 1-page double-spaced response (max!), please use the P/E market multiple valuation approach described in the Stock Analysis Exercise Word file to estimate your firm’s intrinsic, or fundamental, value and then compare it to the stock’s cu
ent price. You can use the FactSet data service’s functions as described in the Stock Analysis Exercise file to help guide you in deriving the estimates for the firm’s equili
ium P/E ratio and EPS forecast. Also,
iefly describe on this page the key steps in formulating your estimates of the stock’s intrinsic value, P/E ratio, and next year’s EPS.
Question 2. Perform a technical analysis of your stock (MSFT) and, in combination with your stock’s intrinsic valuation obtained in Question 1, identify whether you would want to buy, sell, or hold this stock and compute your estimate of the Return-to-Risk ratio for this stock.
In supporting your
ief, 1-page double-spaced response (max!), please use either FactSet’s or Yahoo Finance’s Charting function to perform a technical analysis of your stock’s price patterns over the past 12 months. At a minimum, use 3 technical indicators (e.g., moving average, trend lines, relative strength indicator) in your analysis to identify a short-term target price and a stop loss price. In addition, compute the Return-to-Risk ratio based on these price estimates and the cu
ent stock price to see whether you should buy, sell, or hold the stock at this time.
Question 3. Take a screen shot of your stock’s (MSFT) limit order book during U.S. trading hours and describe how liquid is the trading in your stock. You can use the data from this limit order book display in FactSet (via the Prices… Global Quotes function) as well as the four key attributes of a liquid market to answer this question.
In supporting your
ief, 1-page double-spaced response (max!), please refer to the firm’s limit order book display to explain how liquid the market for this stock is based on the four key attributes of liquidity. At a minimum, also use the screen shot of FactSet’s Global Quotes function to compute the best bid and offer (BBO), the quoted spread, quote midpoint, and relative quoted spread. For the BBO, please also identify which exchanges are reporting the best bid and the best offer, respectively. After deriving this information, please calculate an estimate of the stock’s 1-way transaction cost (e.g., TCin or TCout) using the sum of the stock’s quoted spread and a 1-cent per share
okerage commission (expressed as a percentage of the stock’s quote midpoint). Then, compute your stock’s net round-trip 1-year return (Rnet) by assuming the stock’s gross annual return is 10%. Lastly, calculate the stock’s alpha using this net return and assuming the expected return for your stock (i.e., E(Ri)) is 8.0%.
Question 4: (Conceptual; no calculations required)
Use the synopsis of this 8/27/20 The Economist article (“Big Fish: In 20 years, exchanges have gone from clu
y firms to huge conglomerates”), and the concepts discussed in class, to answer this question.
“Stock exchanges used to be owned by their members, which were mostly banks and
okers. When the biggest went public in the 2000s, they earned their revenues by charging fees on equity issuance and transactions. The exchanges sought to diversify by expanding a
oad and becoming trading venues for other assets, like derivatives and cu
encies. Most moved into clearing and settlement facilities, too.
Now, the elite exchanges have turned their attention to data. On August 6th ICE (which owns the NYSE) said it had agreed to pay $11bn for Ellie Mae, which tracks the mortgage industry. Also, the LSE is awaiting approval of its $27bn bid for Refinitiv, a market-data firm. The hunt, says David Schwimmer, LSE’s boss, is only beginning. Whereas trading volumes are cyclical, indices and data are typically sold via more stable annual subscriptions. Oliver Wyman, a consultancy, expects trading revenues to stagnate or even decline, but those from crunching data to grow by over 5% annually in coming years.”
Question: How do you think the big exchanges’ diversification into data services will affect the four attributes of liquidity for the financial markets that they run (e.g., ICE’s ability to create and maintain liquidity at its NYSE subsidiary)? Briefly explain via a 1-page double-spaced response (max!).
Use the FactSet data service to evaluate a stock using fundamental analysis using the Company / Security, Industry, and Quotes menus at the top of the screen. Include in your analysis the following steps.
Develop a comprehensive description of the stock and its key attributes that affect firm value. For example, first click on the Company/Security menu at the top of the screen and you can then use the Overviews tab found on the left side of this screen to view data from the following dropdown choices:
a. Use the “Snapshot” link for a
ief description of firm’s business, average daily trading volume, market cap, WACC, Beta, and Long-Term Growth Rate.
. “RBICS Rev” is useful to understand the firm’s
eakdown of revenues across business segments.
c. “Supply Chain” can identify how co
elated the firm is with its key suppliers, customers, and partners.
d. “Comps” displays key performance data for the firm’s main competitors, as well as industry average and median data.
e. “Event Calendar” provides dates for earnings releases and earnings calls that can serve as a catalyst for the stock price to move significantly in the near future.
f. “ESG” can show the firm’s percentile ranking in terms of Environmental, Social, and Governance (ESG) issues that can affect the firm’s reputation and efficiency.
Within the Industry menu choice at the top of the screen, use the Overviews tab on the left side of this screen to provide a very
ief description of the stock’s industry / sector trends (via the “Snapshot,” “Earnings & Drivers,” and “Comparison” dropdown choices). In addition, you can compare the stock’s P/E ratio and stock returns relative to an industry sector average and its key competitors via the “Performance” dropdown choice. Also, the News & Research tab has a “Key Players News” link that provides up-to-date news on the firm and its competitors which can serve as a catalyst for future price moves.
Back within the Company/Security menu choice, you can click on the Overviews tab on the left side of the screen in order to select the “Comps” dropdown choice to compare your firm’s key financial metrics with its main competitors. You can change the data fields you want to see by right-clicking on any column, choosing “Report Options,” and then selecting the “Data Items” tab within the dialog box. To compare the stock’s performance to a benchmark such as the S&P 500, you can use the Prices tab and its “Return Analysis” dropdown choice.
Compare the company’s historical earnings growth rate (g), dividend yield, and ROE to Wall Street analyst forecasts by going to the Company/Security menu and first selecting the Estimates tab and then using the “All Estimates” dropdown choice. For example, this screen can be used with the Sustainable Growth Rate concept to estimate the firm’s earnings growth rate via: g = Retention Ratio x ROE, where Retention Ratio = RR = 1 – (Dividends Per Share / EPS).
Use your analysis of growth rates, dividend yields, and P/E ratios to determine the stock’s “equili
ium” P/E. For example, one method to estimate a firm’s equili
ium P/E ratio is by using the firm’s expected growth rate (g) from item 4 above and the firm’s dividend yield (where, dy = Dividends Per Share / Stock Price) which can be found in the “All Estimates” dropdown choice, as follows: Estimated (P/E) = g + dy = (RR x ROE) + (DPS / SP).
Make a forecast of the company’s EPS for next year. One suggestion for doing this: Next Year’s EPS = Cu
ent Year’s EPS x (1+g). This approach uses the Sustainable Growth Rate concept from item 4 above to estimate g via: g = Retention Ratio x ROE, where Retention Ratio = RR = 1 – (Dividends Per Share / EPS). Alternatively, you can use the firm’s historical earnings growth rate or competitors’ growth rates instead of the Sustainable Growth Rate estimate if you wish. Once you have your EPS estimate for next year, you can compare it to Wall Street analysts’ average forecast (see the “All Estimates” dropdown choice in the Estimates tab of the Company/Security menu).
Determine the stock’s intrinsic value: Estimated Stock Price = Estimated (P/E) x Estimated (Next Year’s EPS).
Determine if the stock is underpriced or overpriced by comparing your firm’s intrinsic value (based on the Estimated Stock Price derived in step 7) to its cu
ent stock price displayed within the Company / Security menu via the Overviews “Snapshot” dropdown choice.