Baker informs Covey that the highest and lowest reasonable alternative estimates of the valuation model parameters are as follows: 15% for beta, 20% for equity risk premium, and 25% for growth rate. He asks Covey to perform a sensitivity analysis for each of these parameters while keeping all other inputs at the base case level. Covey’s results are shown in Exhibit 2.
EXHIBIT 2
SENSITIVITY ANALYSIS TO MODEL PARAMETERS IN VALUATION OF WADGETT’S COMMON SHARES
Parameter | Per-Share Valuation with Low Estimate | Per-Share Valuation with High Estimate |
FCFE growth rate | $25.67 | $89.29 |
Equity risk premium | $93.15 | $25.70 |
Beta | $70.14 | $28.25 |
Q. Using the data in Exhibit 2, the parameter that causes the greatest sensitivity in valuing Wadgett’s common shares is the:
- beta.
- growth rate.
- equity risk premium.
Solution
C is correct. When the low/high measure of each variable is tested singly for sensitivity in predicting a range of intrinsic value while holding the other variables at the base case, the equity risk premium variable produces the largest stock price range, as shown in the following table.
Variable | Valuation with Low Estimate | Valuation with High Estimate | Valuation Range |
---|---|---|---|
Equity risk premium | $93.15 | $25.70 | $67.45 |
FCFE growth rate | $25.67 | $89.29 | $63.63 |
Beta | $70.14 | $28.25 | $41.88 |
Note: The risk-free rate is 1.2% in all cases.
题目里15%for bate 20%for equity是什么意思,是变动幅度吗,那敏感性不是应该除以这个幅度算是每1%的变动引起value的变动来比较吗