Required Rate of Return on Company A & B Equity - Accounting & Finance Assignment Help

Assignment Task

Task 

Assignment
Each student is required to choose two companies (Company A & B) from the list of companies that are publicly traded on the main market of the London stock exchange (LSE).  For companies (Companies A and B), you can collect the data such as stock prices from one of the various sources: for example, Yahoo Finance, Bloomberg, or Datastream. For the financial statements or other information about the companies, it is also advised to check the company’s webpage.

Part 1
To complete this part, you will require data on your companies’ monthly common-stock returns from January 2017 to December 2021.1

Required:
1. Suppose you are advising an investor who is considering investing all his/her wealth in the stock of just one of the two companies that you chose (Company A or B).
a. Provide brief descriptions of Company A and of Company B.
b. Next, compare and contrast the stock return performance of the two companies’ common stocks over the calendar period using monthly return data from January 2017 to December 2021. Specifically, calculate the mean, variance and standard deviation of the monthly returns of the two stocks separately.
c. Briefly comment on your results and make a stock recommendation.

2. Now suppose you are advising an investor who is considering investing all his/her wealth in a portfolio consisting of the two companies’ common stock (Company A and Company B) held together.
a. Calculate the mean, variance and standard deviation of the returns of portfolio comprising the two stocks with equal weights (i.e. 50:50). Next repeat the calculations for alternative portfolio weights, including 10:90, 20:80, 40:60, 60:40, 80:20, and 90:10. You may choose to construct other additional portfolios (but remember the portfolio weights need to add to 100%). Report your results in a table. Compare and contrast your findings with those of the single-stock portfolios in 1(b).
b. Illustrate your results in 2(a), along with the single-stock results in 1(b), in a graph plotting the trade-off between the mean return and standard deviation of the portfolio returns.
c. In the trade-off graph in 2(b), indicate the efficient frontier (assuming the stocks of Company A and B are the only available assets).
d. Finally, try to identify the minimum variance portfolio in the trade-off graph. To do so, you can use trial and error, or the method outlined in the notes that you can find in MyPlace. Report the portfolio weights of the minimum-variance portfolio, and the mean, variance and standard deviation of returns of the minimum-variance portfolio.
e. Based on your findings in the previous parts, briefly explain to the investor how to choose his/her optimal portfolio assuming the two stocks are the only assets available to him/her. Also briefly indicate how your advice would change if other assets (e.g., risk-free asset) became available to the investor.

Part 2
In Part 2, focusing only on Company A that you chose, you are asked to implement the firm (equity) valuation models by estimating the future dividend flows of Company A. You should clearly explain your calculations and methods used in 1 and 2. It is also recommended to briefly describe and justify the data and (proxy) measures you are using, and state and discuss any assumptions you are making. Any assumptions made to estimate the future dividend flows or cost of capital should be clearly explained with rationale.

Required:
1. Calculate investors’ required rate of return on Company A’s equity.
2. Calculate Company A’s equity value.
You can choose either the dividend discount model or the total payment model. It is recommended to briefly explain your choice. It is also expected to see the comprehensive understanding on Company A’s dividend policy or investment strategy. This will also help to justify your estimate of future dividends or stock repurchase to implement the model.
3. Compare your value in 2 with the market value (stock price).

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