Option #1: Computing Intrinsic Value

Step 1:

Go to http://finance.yahoo.com/ (Links to an external site.)Links to an external site.and enter CAT (Caterpillar). Do the following:

Pick up CAT’s opening stock price on January 4, 2015 (the first trading day in 2015). You can find this in Historical Prices and then change the frequency to monthly. You can also find the information on this spreadsheet in the link below (the unadjusted price data), linked in this module folder.

When looking at historical prices, pick up the total quarterly dividends paid in 2014. You will see dividends listed with the monthly prices.

Look under Analyst Estimates and find out what analysts estimate the growth rate will be for the next five years.

Also find CAT’s beta under Key Statistics.

Step 2: Now, assume that the risk-free rate of return is 3% and that the market rate of return is 12%. Also assume that Caterpillar is a constant growth firm. In a Word document, complete the following requirements. Show your supporting calculations for parts 1-3.

Compute the required rate of return on Caterpillar using the Capital Asset Pricing Model (CAPM).

Using the annual dividend, the required rate of return from CAPM, and the growth rate from analysts, compute the intrinsic value of Caterpillar using the constant growth model. If the estimated growth rate is more than your required rate of return, then use 20% as the growth rate.

Compare intrinsic value to CAT’s current stock price. Discuss the investment decision given these results; that is, would Caterpillar be a good investment when you compare price to intrinsic value? Explain your answer.

Step 3: Identify and briefly discuss two potential weaknesses of your analysis and results. Your paper must conform to the CSU-Global Guide to Writing and APA (Links to an external site.)Links to an external site..