; Calculation of Value of Stock
Documents
Resources
Learning Center
Upload
Plans & pricing Sign in
Sign Out
Your Federal Quarterly Tax Payments are due April 15th Get Help Now >>

Calculation of Value of Stock

VIEWS: 15 PAGES: 8

Explain about undervalued stock and overvalued stock with an example and compute the following: 1. Long position in the undervalued stock. 2. Short position in the overvalued stock. 3. Total return. 4. Compare the individual returns to market returns over the same period. And also summarize the investment performance.

More Info
  • pg 1
									                 Finance

    Homework Help
24/7 Support
                                      Step-by-Step Solutions




                LEARN TO EXCEL
                                          Experienced Tutors

Detailed Explanation




           www.classof1.com/homework-help/finance
                   Toll Free: 1-877-252-7763
Sub: Finance                                                                            Topic: Stock Valuation

Question:

Calculation of Value of Stock.

Explain about undervalued stock and overvalued stock with an example and compute the following:

1. Long position in the undervalued stock.

2. Short position in the overvalued stock.

3. Total return.

4. Compare the individual returns to market returns over the same period.

And also summarize the investment performance.

Order History




EXH: EXTERRAN HOLDING INC.

COP: CONOCOPHILLIPS



                              www.classof1.com/homework-help/finance
 *The Homework solutions from Classof1 are intended to help students understand the approach to solving the problem and not for
                              submitting the same in lieu of their academic submissions for grades.
Sub: Finance                                                                            Topic: Stock Valuation




Graph of Portfolio




                              www.classof1.com/homework-help/finance
 *The Homework solutions from Classof1 are intended to help students understand the approach to solving the problem and not for
                              submitting the same in lieu of their academic submissions for grades.
Sub: Finance                                                                            Topic: Stock Valuation




Transaction History




                              www.classof1.com/homework-help/finance
 *The Homework solutions from Classof1 are intended to help students understand the approach to solving the problem and not for
                              submitting the same in lieu of their academic submissions for grades.
Sub: Finance                                                                            Topic: Stock Valuation

Solution :

We believe that CONOCOPHILLIPS is an undervalued stock as EPS for the nine months have been
roughly at $3.3 which would result to an annualised EPS of $4.5 per share thereby resulting in a P/E
ratio of roughly 11.70 as compared to the industry average of roughly 20( as per Reuters finance). The
1 year forward P/E ratio is at 8.62( as per yahoo finance). CONOCOPHILLIPS has had a long term
history of performing well. In light of the above we have taken a long position on the stock.

EXTERRAN HOLDING INC. is engaged in the full-service natural gas compression business. It is trading
at a 1 year forward EPS of 39.09 (as per yahoo finance). The industry P/E is at 13.43.Its current 9
month EPS is at -$3.76( as per Reuters finance). In light of the above we believe that EXTERRAN
HOLDING INC. is an overvalued stock and hence we have taken a short position on the stock.

Computations:

Return on Long Position

Loss $53($68-$15) on an investment of $1589.80.

Return = ($53*100)/$1589.80 = -3.33%

Annualised return = -3.33*365/38 = -31.98%

Return on the short position

Profit $124.50 on an investment of $1188.

Return = ($124.50*100)/$1188 = 10.48%

Annualised return= 10.48*365/38 = 100.66%

Total return
                              www.classof1.com/homework-help/finance
 *The Homework solutions from Classof1 are intended to help students understand the approach to solving the problem and not for
                              submitting the same in lieu of their academic submissions for grades.
Sub: Finance                                                                            Topic: Stock Valuation
Profit of $71.50($124.50-$53) on a total investment of $2777.80

Return = ($71.50*100)/$2777.80 = 2.57%

Annualised return= 2.57*365/38 = 24.72%

Comparison of individual return with the market

The S&P 500 closed at 1091.06 on Oct 20 the creation of the position date and at 1087.27 on Nov 27
2009 , the unwinding date. The return on the S&P 500 was negative at -.35% which if annualised
would result in a return of -3.34%. Our return on the long position for CONOCOPHILIPS was worse
than the market return at -3.33% for the period and -31.98% annualized. The return for EXTERRAN
HOLDING INC. was way ahead of the market at 10.48% and annualized at 100.66%. Our total return
was at a healthy 24.72% annualized as compared to -3.34% on the S&P 500.

Report of the broker

30 shares of CONOCOPHILLIPS was bought at a total cost $1589.80 net of commission. The total sale
consideration was at $ 1521.80 which would lead to a loss of $68. But since a dividend of $ 15 was
received, hence the loss would reduce by the amount amo
								
To top