Steve Sharpe: A Stock Report

Review of Business & Finance Case Studies, Vol. 1, No. 1, pp. 1-13, 2010

13 Pages Posted: 10 Jul 2011  

William P. Dukes

Texas Tech University - Rawls College of Business

Zhuoming "Joe" Peng

University of Arkansas at Fort Smith

Margaret Tanner

University of Arkansas at Fort Smith

Date Written: 2010

Abstract

This case pertains to the valuation approach for a common stock being considered for purchase by a student in a Student-Managed Fund (SMF) class at a university. The fundamental factors of analysis pertaining to the profile of the company include the firm’s products/services, the nature of the demand for the products and the managerial comparisons for sales. In addition, earnings per share, return on sales, return on assets and return on equity are considered. However, historical data on price-earnings ratios and dividend payout ratios are very important in all valuations, but they are not stressed in the case.The emphasis of the case relates to recognition of risk, as it pertains to the common stock of the firm, estimations of the required rate of return (sometimes known as the hurdle rate), calculation of the “present value factor” which permits analysts to determine the present value of annualized return data projected into a specific future period. A price of the common stock projected into the future can be discounted to compare its present value with the current market price to determine whether the stock is undervalued or overvalued. In like fashion, a holding period return calculated in a time period greater than five years can be annualized for comparison with the required return obtained from an asset pricing model to determine whether the stock is undervalued or overvalued.

This case has a difficulty level appropriate for senior level or first year MBA students. It is designed to be taught in a single class period. Approximately two hours of student preparation time should be adequate for most students depending on their proficiency.

Keywords: Risk, Stock Report, Required Rate of Return, Student-Managed Fund

JEL Classification: G11, A29

Suggested Citation

Dukes, William P. and Peng, Zhuoming "Joe" and Tanner, Margaret, Steve Sharpe: A Stock Report (2010). Review of Business & Finance Case Studies, Vol. 1, No. 1, pp. 1-13, 2010. Available at SSRN: https://ssrn.com/abstract=1881045

William P. Dukes (Contact Author)

Texas Tech University - Rawls College of Business ( email )

Lubbock, TX 79409
United States
806-742-3419 (Phone)
806-742-2099 (Fax)

Zhuoming "Joe" Peng

University of Arkansas at Fort Smith ( email )

Margaret Tanner

University of Arkansas at Fort Smith ( email )

5210 Grand Ave.
P.O. Box 3649
Forth Smith, AR 72913-3649
United States

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