Question

FINANCIAL MANAGEMENT (END 462) SUMMER SESSION TWO ASSIGNMENT

Notes: Read any book (s) in Financial Management or Accounting. You may also read textbooks in Economics and Journal Articles. Then respond to the statements below. Please show your references or sources of material used. Please type a 2-3 page paper  

Major Topic: "Risk and Return" Expand with more information on each of the following. Please respond to the following:

* Determine if stock prices are affected by long-term or short-term performance. Provide one (1) example of the effect that supports your claim

* From the scenario, value to share of TFC's stock using a growth model and compare that value to the current trading price of a share of TFC Determine if the stock is undervalued or overvalued.

Answer 1

As Stock Prices Reflect earnings and growth the stock prices are affected more by long term performance. short term effects can reflect positive and negative performance. Every Company can have a bad quarter and if investors makes decision only based on short time frame they will never invest. Long term performance signifies the trend that stock holders use to determine the value of stock and decide whether it is worth investing.Long Term Performance also determines how a company can turn around the bad situation into good one that can gives a belief to the stock holders that down the line everything will be fine.Many things happens in the short term like mergers,new laws, economy and more and long term performances are the recovery of short term imperfections.

A good example of how stockholders looking at short term for stock is Dell. Dell is an up and down company with sale performance that changes every quarter.They want long term success instead of short term success for stock holders.

Based on the scenario the constant growth model can be used to compare the value to share of TFC stock and the value of the current trading price of a share of TFC. The dividend flat rate is $10, growth rate is 10% and the required rate of return is 15%. using all of the given information the constant growth model can be used as follows: 10*1.1/.15-.10 = $ 220. TFC current stock price is $220. The Capital Asset Pricing Model or CAPM = RF + B(rm-rf) = 3%+(15%-3%) = 12.6%. Based on the calculation the stock was undervalued