Question

Q-2: You want to include Microsoft stock in your portfolio. Since it is an international company, what factors you would consider to analyze this company’s stocks?

Q-3: A client wants your advice on a stock. He strictly tells you not to use dividend growth or cash flow- based methods of evaluating the stock’s price. What alternative methods would you use to evaluate the stock’s price?

Q-4: Review the statements given below and determine whether they are correct or incorrect. Also explain the reason if they are incorrect.?

Answer 1

Q-2:

The factors considered in analyzing this Microsoft stock are :

• Proportion of revenues / cash flows generated in international markets
• Foreign currency exposure in the foreign markets in which Microsoft operates, and the possible path of changes in exchange rates
• Cost of capital in international markets in which Microsoft operates
• International risk free rate
• Beta of the stock relative to the international stock market index
• Market risk premium over the international risk free rate
• Country specific risk in the foreign markets in which Microsoft operates

Q-3:

The alternative methods are :

• Comparable company method - Comparable companies in the same industry are used to arrive at a relative valuation based on multiples such as PE ratio, EV/EBITDA ratio etc.
• Market multiple method - Market multiples relative to the firm's own historic multiples, or relative to peer companies are used to arrive at a valuation
• Book value method - The book value of the assets and liabilities are used to calculate the book value, and an appropriate multiple of book value is applied
• Comparable transaction method - Transactions in equity of comparable companies are used to calculate a valuation