Questions for Modules 2& 3
Q#1 (Chapters 7 and 13). You recently learned in FIN 602 how to value stocks using the P/E multiples approach, constant dividend growth model, and corporate valuation model. On February 15, 2013, you tuned into CNBC financial TV channel and watch different security analysts discussing the current valuations of Apple, Google, WellsFargo, and Bank of America. However, you are puzzled because these analysts could not agree on the current valuations and end-of-year price targets for these four companies. For example, two analysts argued that Google and Bank o America are currently overvalued, while others reached the opposite conclusion. Their price targets also varied widely. Please solve this puzzle and explain how these analysts can reach such very different conclusions on stock valuations and price targets. You can assume that all analysts are using the same three stock valuation approaches of chapters 7 and 13. Limit your answers to no more than 10 sentences.
Q#2 (Chapter 9). A diversified company has decided to use its overall firm WACC as a performance benchmark for rating its divisional managers and to decide whether new projects from its three divisions should be funded for investment capital. The firm WACC is 12%. The divisional WACCs for its high risk, average risk, and low risk divisions are 16%, 11.9%, and 8%, respectively. Please explain the pros and cons of using the firm WACC in evaluating its divisional managers and projects.
Remember that WACC can be interpreted as a hurdle rate or the minimum acceptable return. Limit your answers to no more than 10 sentences.