CITY UNIVERSITY OF HONG KONG
Financial management group project
CHEUNG HOI KEI
Part I. Introduction
Executive summary •••••••••••••••••••••••••1
Dividend discount model (DDM) •••••••••••••••••••••••••1
Capital asset pricing model (CAPM) •••••••••••••••••••••••••2
Part II. Evaluation of stock
Blue chip stock
1.1 Cheung Kong (Holdings) Limited ••••••••••••••••••••••••4 1.2 The Hong Kong and China Gas Company ••••••••••••••••••••••••5 1.3 The Sun Hung Kai Properties Limited Stock ••••••••••••••••••••••••7 1.4 Tencent Holdings Limited •••••••••••••••••••••••9 2. Small stocks
2.1 Bonjour Hold •••••••••••••••••••••••11 2.2 Emperor Watch&J •••••••••••••••••••••••11
Part III. Conclusion
Blue chip stock & small stock. •••••••••••••••••••••••14
Stock from different industry •••••••••••••••••••••••15
Difficulty on estimation •••••••••••••••••••••••15 Reference •••••••••••••••••••••••16 Appendix •••••••••••••••••••••••17 Part I. Introduction：
1. Executive summary
In this paper we will evaluate 6 stock, including 4 blue chip stock (from Hang Seng Index) and 2 small stock. In order to have a more complete view of stock market, we vary the industry we choose. We use Tencent to show the pattern of fast growing social software and e-business industry, Hong Kong and China Gas for utility companies, The Sun Hung Kai Properties Limited, Cheung Kong Holdings for property industry, Bonjour Hold for beauty industry, Emperor Watch&J for jewelry industry. After introduce the model used, we will evaluate the stock one by one. Then we compare the actual price and estimated price, and show the reason for imparity. Finally we will do comparison between small stock and blue stock, as well as stocks in different industries, and give our conclusion. For convenience, we assume the inflation rate is 0 in our estimation period.
2. Dividend discount model (DDM)
Theory of model
DDM is a method to value a stock based on the theory that the fair-value of stock is the discounted sum of all its future value, namely the present value of future dividend.
Type of dividend estimation
As we cannot get all the future dividend, which have not occur yet, we need do estimations about the trend of future dividend. In this paper mainly three types dividend estimation are used. i. Constant dividend ii. Supernormal growth iii. Constant dividend growth (Gordon growth model) The equation most widely used is Gordon growth model:
The equation of i and ii can also derived from this equation. There are three unknown number in the equation: D1, R and g. g can be easily got from the average growth of dividend.D1¬ can also get from D1=D0 (1+g), with known D0（dividend of this year）and g. The problem is to get R. is it the average growth of historical return? The answer is no. because the stock market is memoryless, we cannot use the past return to estimate the future return. Therefore we introduce the Capital asset pricing model.
3. Capital asset pricing model (CAPM)
Theory of model: CAPM is used to estimate an appropriate required rate of return of an asset, which is in a well-diversified investment portfolio, given a non-diversifiable risk.
Assumptions: Investors: are (1) rational and risk-averse (2) price takers (3) lend and borrow unlimited amounts under the risk free rate of interest (4) have the information at the same time.
Risk: We can then measure risk of other portfolio against that of market portfolio.
Risk= market risk+ specific risk,...
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