Unit 9 Assessment — Stocks & Stock Valuation

📈 Dividend Discount Models

📐 Total Return & Yield

🏷️ P/E & Book Value Approach

⚖️ Market Efficiency & Stock Types

Dividend Discount Models

Zero-Growth (Preferred Stock)P₀ = D ÷ r_s

Constant Growth (Gordon Growth)P₀ = D₁ ÷ (r_s − g)

D₁ = Next Year's DividendD₁ = D₀ × (1 + g)

Non-Constant GrowthPV each dividend individually; then add PV of terminal value

Terminal Value (Horizon)P_N = D_{N+1} ÷ (r_s − g)

Total Return & Yield Decomposition

Expected Total Returnr_s = Dividend Yield + Capital Gains Yield

Dividend YieldD₁ ÷ P₀

Capital Gains Yield= g (constant growth rate)

Required Return (CAPM)r_s = r_RF + (RP_M) × β

Earnings YieldEPS ÷ P₀ (inverse of P/E)

P/E & Book Value Approaches

P/E ValuationP₀ = EPS × Industry P/E Multiple

Price-to-Book (P/B)Market Price ÷ Book Value per Share

Book Value per ShareTotal Equity ÷ Shares Outstanding

EPS Growth ImpactHigher sustainable growth → higher P/E justified

Intrinsic vs. Market PriceIf intrinsic > market → undervalued → buy signal

Market Efficiency & Stock Types

Weak-Form EMHPast prices cannot predict future returns

Semi-Strong EMHAll PUBLIC info already reflected in price

Strong-Form EMHEven insider info reflected — strongest claim

Common vs. Preferred StockPreferred: fixed dividend, priority claim; Common: residual, voting rights

Preemptive RightExisting shareholders' right to maintain % ownership in new issues

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out of 100 points

—

Section 1

—/40

Multiple Choice

Section 2

—/20

True / False

Section 3

—/20

Short Answer

Section 4

—/20

Extended Response

⚠ Sections 3 & 4 are teacher-graded. Use the rubric selectors below to finalize the score.

Multiple Choice

Select the best answer · Includes DDM, Gordon Growth, P/E & total return calculations

2 pts each · 40 pts

Click the best answer. Use the formula reference panel and model quick-strip above. Round to the nearest cent or tenth of a percent unless stated otherwise. Each question is worth 2 points.

True or False

Click TRUE or FALSE for each statement

2 pts each · 20 pts

Select TRUE or FALSE for each statement. Each is worth 2 points.

Short Answer

Show all calculations + explain in 2–4 sentences · Teacher-graded

5 pts each · 20 pts

Answer in 2–4 complete sentences. Show every calculation step clearly. Rubric selectors appear after grading.

Extended Response — Swanson Initiative Stock Selection Memo

3-company valuation · DDM · P/E · Buy / Hold / Sell · Teacher-graded

20 pts

Read the scenario carefully. Write a well-organized analytical memo of at least 8 sentences. Show all calculations with labeled steps. Use and underline at least four unit vocabulary terms.

📋 Scenario — Swanson Initiative: Evaluating Three Community-Connected Stocks

The Swanson Initiative investment committee is screening three dividend-paying stocks for potential inclusion in the youth portfolio. Each stock has a different growth profile. As student analyst, you must value each stock, compare intrinsic value to market price, and write a buy / hold / sell recommendation memo.

Stock 1 — Preferred (Zero Growth)

Fixed annual dividend: $5.00 · Required return (r_s): 8% · Current market price: $58

Stock 2 — Utility (Constant Growth)

D₀ = $2.40 · Constant growth: 4% · Required return (r_s): 9% · Market price: $52

Stock 3 — Tech (P/E Method)

EPS = $3.50 · Industry P/E = 18× · Market price: $58 · r_s = 12%

Market Efficiency Question

If markets are semi-strong form efficient, should the committee rely on public financial ratios alone to consistently beat the market? Explain.

35 Write your full stock valuation memo covering all four parts: (a) Value the preferred stock (Stock 1) using the zero-growth DDM — show work, state intrinsic value vs. market price, and give a buy/hold/sell signal with justification; (b) Value the utility stock (Stock 2) using the Gordon Growth Model — calculate D₁ first, then P₀ — state intrinsic value vs. market price and your signal; (c) Value the tech stock (Stock 3) using the P/E multiple method — state intrinsic value vs. market price and your signal; (d) Explain in 2–3 sentences whether the committee should expect to consistently find undervalued stocks using only publicly available financial data, referencing the semi-strong form of the Efficient Market Hypothesis. Use at least four underlined vocabulary terms.

📋 Teacher Scoring Rubric

Criterion	Excellent (Full)	Proficient (Partial)	Developing (Minimal)	Score
Part (a) — Preferred Stock Valuation P₀ = $5.00 ÷ 0.08 = $62.50 · Market = $58 → Intrinsic > Market → UNDERVALUED → Buy	P₀ = $62.50 correctly calculated; compares to $58 market price; buy signal justified	Formula correct; arithmetic minor error OR signal missing	Wrong formula or no signal given	/5
Part (b) — Utility Gordon Growth D₁ = $2.40×1.04 = $2.496 · P₀ = $2.496÷(0.09−0.04) = $2.496÷0.05 = $49.92 · Market = $52 → Overvalued → Sell / Hold	D₁ calculated correctly; P₀ = $49.92 shown; overvalued conclusion with signal	D₁ or P₀ correct but not both; or valuation comparison missing	Wrong model applied or both calculations missing	/5
Part (c) — P/E Valuation P₀ = $3.50 × 18 = $63.00 · Market = $58 → Intrinsic > Market → UNDERVALUED → Buy	P₀ = $63.00 correctly calculated; compared to $58; buy signal given with reasoning	Calculation correct; signal absent or not justified	Wrong formula or arithmetic error without acknowledgment	/5
Part (d) — EMH Semi-Strong Explanation	Correctly explains semi-strong EMH means all public information is already priced in; using public ratios alone cannot consistently generate excess returns; acknowledges limitations for the committee	EMH concept referenced correctly but implications for the committee are thin	EMH mentioned but incorrectly defined or no application to scenario	/5

Extended Response Total: — / 20

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Stocks &Stock Valuation

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