Fama-French Three-Factor Model Case Study
In order to capture risk premiums better than with CAPM Fama and French developed The Three-Factor model. The variables are based on prior evidence and predict well average returns. There are two easily measured variables in addition to the beta, Small Minus Big and High Minus Low. Small Minus Big, often referred as SMB, is a factor trying to capture the size premium and according to Fama and French it works as proxy for risk. High Minus Low, otherwise known as HML, is a proxy for risk that value stocks carry. The smaller the company and the greater its book-to-market ratio, the riskier it is. Thus small companies with high book-to-market ratios should earn higher returns than the market on average. (Fama & French, 1992, 1996). The Fama-French three-factor model is …show more content…
Based on the previous model was developed constant-growth DDM, or the Gordon model, named after Myron J. Gordon. Constant-growth DDM simplifies the valuation process because we don´t need dividend forecast for every year into the indefinite future. Instead estimate for the dividend growth is used. The formula for constant-growth DDM presents as follows (Bodie et. al 2011b: 768-771; Gordon & Shapiro 1956):
P_0=D_1/(k-g) where g = estimated growth rate of dividends
From the formula, it can be seen that the growth rate of dividends (g) must be smaller than the required rate of return (k) otherwise current value of the share would be infinite. The stocks valuation will be higher what higher the growth rate (g) is, the lower required rate of return (k) is and the higher first year’s dividend is. (Bodie et. al 2011b: 768-771; Gordon & Shapiro 1956). It can be viewed from the formula that getting the expected growth rate wrong has substantial impacts to the
Home Depot Financial Analysis Essay
1214 Words | 5 PagesThe Home Depot has paid a dividend each quarter since the 1990’s, raising dividends on every fourth occasion. They even continued to roll out dividends during the financial crisis in 2008 and 2009. For a company so dependent on the housing market this is extremely impressive, and speaks volumes about financial strength. Management currently promises on returning 50% of earning each year through quarterly dividends. They are also committed to reducing share count.
Dollarama Company Case
990 Words | 4 PagesThis is the measurement of the levels of investor confidence which influences the value of a firm in the
Case Study: Dollar General
760 Words | 4 PagesThe DCF method has a lot of advantages over the Multiples approach, one would be that the DCF method considers the future of a company and values the future cash flows for every debt or equity holder. So, this method forces us to explicitly explore and analyze the fundamental factors that drive business value creation. Another advantage is the discount factor which shows us if a given company will be able to generate cash flows equivalent to its riskiness. A disadvantage of the DCF method is its complexity. The Multiples approach is usually only used to get a rough estimate how much a company could be worth.
Calaveras Vineyard Case Study Solution
1061 Words | 5 PagesThe Calaveras Vineyard, established as early as in 1883 in California initially aimed at making wine for the Catholic Church. The man behind this family owned business was Esteban Calaveras. Over the years the ownership has been changing but improvements in brand quality and standards remained the key to success. Technological changes also improved market positions chiefly through capital improvements. New strategies helped the company secure good positions regarding cash flow.
Analysis Of Chipotle's Sensitivity Analysis
1385 Words | 6 PagesSensitivity Analysis The sensitivity analysis focuses on examining how Chipotle’s valuation changes when some key inputs vary. Two of the most important inputs of the valuation are the weighted average cost of capital (WACC) and the perpetuity growth rate. In this thesis, it is assumed that Chipotle would have a WACC of 6.65% and a perpetuity growth rate of 2.84%, which would result in a share price of $443.90 for Chipotle.
Laurence Shames The More Factor Analysis
273 Words | 2 PagesThe essay “The More Factor” by Laurence Shames explains about the Americans desire of wanting more and more. It focuses on how Americans have been influenced by the frontier belief “that American would keep on booming” (para. 8). He was trying to show that what we have back than in 1800s and what we have today is, way more than expected. However, people desire of achieving more will never end.
Comparison Of Nordstrom Vs Nordstroms
1345 Words | 6 PagesConversely, Nordstrom has been able to produce value in the market, which is reflected in their high market-to-book ratio. Because of this, investors using these ratios will be more likely to seek equity in Nordstrom’s rather than
Ryanair Financial Ratio Analysis
2985 Words | 12 PagesTerm of Reference Background Objective Executive Summary Financial Ratios Formula Financial Ratios Analysis of BA and Ryanair Horizontal Analysis of Income Statement Vertical Common Size Analysis of Balance Sheet Comparison of the two companies Strength and Weaknesses Conclusions/recommendations --- Terms of Reference a) Background A success degree of one company can be measured by comparing its financial performance to its competitor. By assessing two companies, this will enable to adequately evaluate their current positions in the market, and to eventually learn as to which one of the two truly applies the better or most successful business model.
Similarities And Differences Between The Single Index Model And Capital Asset Pricing Model
1217 Words | 5 PagesOutline the similarities and differences between the Single Index Model (SIM) and the Capital Asset Pricing Model (CAPM). Justify which of the two models makes a better assessment of return of a security (25 marks). To reduce a firm’s specific risk or residual risk a portfolio should have negative covariance or rather it should have no variance at all, for large portfolios however calculating variance requires greater and sophisticated computing power. As such, Index models greatly decrease the computations needed to calculate the optimum portfolio. The use of such Index models also eliminates illogical or rather absurd results.
The Eight Factor Model
3112 Words | 13 PagesThe first major piece of United States health care legislation started with our 2nd president, John Adams who in 1798 signed an Act for the ill-stricken and disabled seamen. Within this act, it stated that from a seamen’s paycheck that twenty cents per month would be allocated to cover any medical bills. Many years have passed with greater technologies, more educated physicians, and health care reform within our health care system. While some health care systems are more technologically advanced with physicians going through extended educational programs, other countries are stricken with disease, have medication and vaccination shortages, and a health care system that is non-existent. Even though the United States has issues within government
Neo Personality Inventory Case Study
734 Words | 3 PagesNeo Personality Inventory Psych 220 Dr. Jacobsen Salem College Victoria Murray March 1, 2018 Costa, P. T., Mccrae, R. R., & Kay, G. G. (1995). Persons, Places, and Personality: Career Assessment Using the Revised NEO Personality Inventory. Journal of Career Assessment, 3(2), 123-139. doi:10.1177/106907279500300202 Neo personality Inventory measures thirty traits.
Lehman Brothers Red Flags Case Study
985 Words | 4 PagesLow valuation ratios of these two companies indicated that their stock price might not be
Capstone Reflection
1612 Words | 7 PagesAs the results (Appendix 1) shows, leverage and PB ratio have positive relationship with dividend payout ratio, while, risk, growth, profitability and size have negative relationship with dividend payout ratio. According to the results, banks can adjust the dividends declared corresponding to its situations. The project also introduces the relationship between the dividends and information-sensitive depositors (Appendix 2). These all are helpful for banks to make dividends decision and find the optimal payout ratio for the development. 2.
Harry Davis Case Study
846 Words | 4 Pagese. (2) Another method for estimating growth rate: Another method for estimating the growth rate is to use the retention growth model: g = (1 - Payout Ratio) ROE In This is consistent with the 5% rate given earlier. e. (3) DCF method could be applied if the growth rate were not
Single Index Model And Capital Asset Pricing Model
1129 Words | 5 PagesOutline the similarities and differences between the Single Index Model (SIM) and the Capital Asset Pricing Model (CAPM). Justify which of the two models makes a better assessment of return of a security (25 marks). To reduce a firm’s specific risk or residual risk a portfolio should have negative covariance or rather it should have no variance at all, for large portfolios however calculating variance requires greater and sophisticated computing power. As such, Index models greatly decrease the computations needed to calculate the optimum portfolio. The use of such Index models also eliminates illogical or rather absurd results.
More about Fama-French Three-Factor Model Case Study
Home Depot Financial Analysis Essay
1214 Words | 5 PagesDollarama Company Case
990 Words | 4 PagesCase Study: Dollar General
760 Words | 4 PagesCalaveras Vineyard Case Study Solution
1061 Words | 5 PagesAnalysis Of Chipotle's Sensitivity Analysis
1385 Words | 6 PagesLaurence Shames The More Factor Analysis
273 Words | 2 PagesComparison Of Nordstrom Vs Nordstroms
1345 Words | 6 PagesRyanair Financial Ratio Analysis
2985 Words | 12 PagesSimilarities And Differences Between The Single Index Model And Capital Asset Pricing Model
1217 Words | 5 PagesThe Eight Factor Model
3112 Words | 13 PagesNeo Personality Inventory Case Study
734 Words | 3 PagesLehman Brothers Red Flags Case Study
985 Words | 4 PagesCapstone Reflection
1612 Words | 7 PagesHarry Davis Case Study
846 Words | 4 PagesSingle Index Model And Capital Asset Pricing Model
1129 Words | 5 Pages