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Calculate risk-free rate using average of the annual 3-Month Treasury Bill interest rates over the estimation period.

October 27, 2021
Christopher R. Teeple

In this assignment, you will choose a company of interest (FORD MOTOR CO) and evaluate its stock’s fundamental value. You will practice how to 1) Use the beta of the stock, market return, and risk-free rate to calculate the required rate of return, 2) evaluate the stock using constant growth dividend discount model. Assignments should be submitted in the format of excel files.
Data: 1) the company’s dividend history from finance.yahoo.com or the company’s own website.
2) the company’s market risk exposure measured by “Beta (5Y Monthly)” from the company’s summary page on finance.yahoo.com
3) choose an estimation period for the required return R, at least going back a 5-year period.
4) risk-free rates (annual rates) for the estimation period; the rates are available monthly at https://fred.stlouisfed.org/series/TB3MS
5) monthly market index (use S&P 500) “Adj Close” prices for the estimation period https://finance.yahoo.com/quote/%5EGSPC/history?p=%5EGSPC
Part I. calculate required return R
1) Calculate risk-free rate using average of the annual 3-Month Treasury Bill interest rates over the estimation period.
2) Calculate the monthly market return = (Adj close at the end of month – Adj close at the end of pervious month)/Adj close at the end of previous month
3) Calculate annualized market return = average monthly return * 12
4) Use the formula to calculate required return R = risk-free rate + beta*(annualized market return – risk-free rate).
Part II.
1) Estimate the growth rate of dividends from dividend history data. There is no specific formula for estimating g using historical data. You can use the most recent growth rate, the average growth rate for the past 5-years, or your own model.
2) Use the Constant Growth Model in the (a case of the Dividend Discount Models): Intrinsic Value = D0(1+g)/(R-g)
where D0 is the current annual dividend, and R is the required return we estimated in part I.
Compare your calculation of intrinsic value to the market price, what are your observations and conclusions?

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