Please go to the following web site and find the stock information for JPMorgan
ID: 1171182 • Letter: P
Question
Please go to the following web site and find the stock information for JPMorgan (JPM): https./finance yahoo.com/quote/PM2p IPM Recently a relative left you a substantial amount of money, which you wish to invest. After the recent increasing gas prices, you have decided to invest in a company's stock in the technology and consulting The information that you have been able to find on JPMorgan (JPM) allows you to see the company's P/E ratio, dividend yield, beta and EPS. industry. As you know there are several ways to d ue o The information that you have been able to find on JPMorgan (JPM) allows you to see the company's P/E ratio, dividend yield, beta and EPS. 1. Please list that information for JPM and the date you found the information. There are three methods you might use to determine the stock value of JPMorgan (JPM), Price-Earnings Method, Dividend Discount Method, and using CAPM to determine value 2. Please tell me how in detail the information you have found might be used to determine the value of the stock in one of these three methods. Using any of these methods is based information for the company at a given time. The market is merging the economic, market and firm specific factors to determine the "current" value. Which of these factors do you think is best to rely on for a long- term value of a firm's stock and why? 3.Explanation / Answer
1A)Name of the Company : JP Morgan
Date:15/6/2018
P/E Ratio= 17.12
EPS = 6.31
Beta = 1.12
Dividend Yield = 2.24
2) Methods to determine stock price of JP Morgan
P/E: Under this method we estimate forward earnings of JP Morgan ,and by Multiplying P/E ratio with earnings we can estimate Share Price of JP Morgan .
Share price= P/E * Earnings (Forward)
P/E is more useful in relative valuations. Single ratio may not reveal anything.
Dividend Discount Model :It is an absolute valuation method and requires many assumptions such as stable growth rate etc. Suited for stable and mature companies.
Under this we estimate dividends of next period D1 ( we take as D0*1+G) as we assume constant growth in dividends.
Price/ Value of the stock= Current Dividend ( 1+ Growth rate)/ R-G
R= required return
G= Real single stage Growth rate
CAPM: It discusses the relation between risk and expected return of the securities
Under this method Expected return is
R (Expected Return)=RF + Beta (RM-RF)
RF+ Risk Free rate
Beta= Systematic Risk
Rm= Market Return
CAPM also requires many assumptions such as borrowing at risk free rate etc. Caluclating Beta and Risk premium (RM-RF) is also difficult.
Among these methods , DDM and P/E methods will focus om firm specific factors (such as earnings and dividends etc) and market risk will be addressed by CAPM model
3) For this company, I will use Dividend discount model as JP Morgan is a well known stable (mature) company. Of course the only disadvantage is its assumptions.
P/E is more useful in comparisions (relative valuations)
CAPM will only consider Market Risk and Ignores company wide issues mentioned in the question. CAPM also assumes asset can be borrowed at risk free rate.
Note: If its an unknown company or other start up assumptions in DDM such as stable growth are a big problem. Each method has its own merits and draw backs. Analysts have to make a choice depending upon the situation.