BEM 107 projects
1. Luck versus skill. Assume that performance equals the sum of luck and skill:
p = s + l s is distributed normally with mean E(s) and variance Var(s). l is distributed normal with mean 0 (otherwise it would not be luck) and variance Var(l). Because luck is luck it must be uncorrelated with s (otherwise it would have a skill element). Solve for E(s|p) – i.e. given that we observe p, what can we say about s.
2. Graph the POW for Wells Fargo, JP Morgan, Citigroup and Bank of America from July 2007 to the present using monthly data. Don’t forget about dividends. Provide spreadsheet with all the returns as well as your graphs.
3. Estimate the WACC for Edison International. Use 35% as the tax rate. Use the CAPM to estimate the cost of equity. Explain precisely what assumptions you made to complete your analysis.
4. Produce graphs of the term structure of Treasury rates as approximate year end for the years 2004 to 2009. Can you offer any explanation for the change in the nature of the yield curve. (Hint: data on yield curve is available from the Fed. It is up to you to find the right numbers.)
5. Estimate the equity value of Apple using the discounted cash flow approach. In forecasting future financial statement items, simply use reasonable projections from historical data. Use a WACC of 12%.
6. Estimate the equity value of Apple using the residual earnings approach explained by Penman. In forecasting future financial statement items, simply use reasonable projections from historical data. Use a cost of equity of 12%.
7. Estimate the value of Disney using multiples. Explain what comparables you chose and why. Explain what valuation ratios you found to be most applicable.
8. Estimate the residual return for Google for the year 2009 using three different approaches to estimate the expected return: the one-factor market model, a market and industry model (use Microsoft, Yahoo, Amazon and e-Bay as the industry) and the Fama-French three-factor model. The factors are available on Ken French’s home page. Use monthly data.
9. Do an event study beginning 5 days before Microsoft’s bid for Yahoo and running for the next month. Do it for both companies. Focus only on what you feel are the most important announcements from a valuation standpoint. (There is a great deal of news about both companies in the market.) To net our market effects just use the S&P 500.
10. Based on the event study, calculate the wealth effects of the Microsoft bid and subsequent announcements for both Microsoft and Yahoo and in the aggregate. Develop an economic argument that explains the results.