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INV3701 Semester 1 Assignment 1 2022 Answers
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INV3701Investments: Equity Asset Valuation
Assignment Solutions: Semester 1 Assignment 1
SEMESTER 1
ASSIGNMENT 01 Due date and time: 18 March 2022 at 13H00
Unique number: 885595
Aim: To evaluate your knowledge of some of the fundamental aspects of equity valuation:
application and process, equity return concepts, the dividend discount model and free cash
flow models. Refer to lessons 1 to 4 in the study guide, which include chapters 1, 3 to 5 and,
7 to 8 in the prescribed book.
Answer the following questions and submit your assignment at https://my.unisa.ac.za.
The following assignment contains 20 multiple-choice questions. [20 marks]
Questions
1. Excess risk adjusted return is also called …
1. beta.
2. theta.
3. alpha.
An excess risk - adjustment return is also called an abnormal return or alpha.
Alpha = expected return - Required return
, For an active investment manager, valuation is an inherent part of the attempt to produce
investment returns that exceed the returns commensurate with the investment’s risk; that is,
positive excess risk-adjusted returns.
2. An analyst has been instructed to use absolute valuation models and not relative
valuation models in her analysis. Which of the following is least likely to be an example
of an absolute valuation model?
1. residual income model
2. dividend discount model
3. price-to-earnings market multiple model
Absolute equity valuation models are present value models. These models specify the intrinsic
value of an asset. Dividend discount valuation models; Residual income model; FCFF and FCFE
are all absolute valuation models.
Relative valuation models estimate an asset’s value relative to that of another asset. The idea is
that similar assets should sell at similar prices, and typically implemented using price multiples
(P/E, P/B, P/S)
3. Which one of the following statements is most likely correct with regard to steps and
activities/actions in the equity valuation process?
1. An analyst applies the valuation conclusions by choosing the FCFE model.
2. To convert his forecast into a valuation, an analyst carried out a sensitivity
analysis.
3. To understand the business, an analyst helped the firm he is evaluating compile
their financial statements.
To convert forecast into valuation, analysts use sensitivity analysis
Sensitivity analysis is an analysis to determine how changes in an assumed input would affect
the outcome.
For example, a sensitivity analysis can be used to assess how a change in assumptions about
a company’s future growth—for example, decomposed by sales growth forecasts and margin
forecasts—and/or a change in discount rates would affect the estimated value.
4. A positive return from convergence of price to intrinsic value would most likely occur if…
1. expected return is greater than required return.
2. required return is greater than expected return.
3. required return equals expected return.
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