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INV3701 Assignment 01 Semester 1 & 2 (Both) 2021
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- University Of South Africa (Unisa)
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Equity Asset ValuationINV3701
Semesters 1 and 2
Department of Finance, Risk Management and
Banking
IMPORTANT INFORMATION
Please register on myUnisa, activate your myLife e-mail account and make
sure that you have regular access to the myUnisa module.
website, INV3701-2021-S1/S2, as well as your group website.
ASSIGNMENT 01 DUE DATE: 28 MAY 2021
SEMESTER 1: Unique number 766789
SEMESTER 2: Unique number 833100
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 online at https://my.unisa.ac.za.
, The following assignment contains 20 multiple-choice questions. [20 marks]
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 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 and situational
adjustments.
- 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.
2
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