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Accounting, Finance, SPSS

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Statistics Project

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English (U.S.)

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# Abbott laboratories Valuation and Conclusion (Statistics Project Sample)

Instructions:

This task was about evaluating the value of Abbott Laboratories stock. We used the Constant Growth Method and the Capital Asset Pricing Model (CAPM) to calculate the fair value of the stock. The Constant Growth Method calculated a minimum value of $42.85 per share, while the CAPM method calculated a value of $92.40 per share. Comparing these values to the current market price of $52.50 per share, it appears that the stock is undervalued. We also discussed the risks involved in investing in any type of business, including financial risk, operating risk, and market risk. We used Abbott's beta of 0.98 to calculate the required rate of return using the CAPM, which was 7.88%. Finally, we concluded that Abbott Laboratories stock is slightly overpriced at the current market price of $52.50 per share, but that it is still an attractive investment opportunity. source..

Content:

Section 4: Abbott laboratories Valuation and Conclusion
Student’s Name
Institutional Affiliation
Submission Date
Section 4: Abbott Laboratories Valuation and Conclusion
Part 1
Investing in any type of business typically entails taking great risk chances. Depending on the type of investment, the level of danger could be low or high. Risk can be broken down into three broad categories: monetary, commercial, and investment. The degree of a company's financial risk is proportional to its reliance on debt within its capital structure. Operating income (or earnings before interest and taxes, or EBIT) variability is the "most common way of defining business risk." (Hickman et al., 2013). Differences in costs and revenues are essentially what drive the variance. Investors' risk refers to the possibility of a negative change in an investment's value. The potential worth of an investment can be estimated by weighing its risk against its expected return.
Market risk is the most significant risk that is difficult to mitigate. However, the term "beta" can be used to quantify market risk. "Beta measures a firm's typical responsiveness to information that impacts the entire market," including "economic growth, political news, inflationary expectations, the balance of trade, natural disasters, and so on" (Hickman, Byrd, & McPherson, 2013 section 9.2). The hope of gaining a profit is intrinsic to taking risks. The goal of most investors is to increase their initial financial investment. Investors will not part with their money if they do not see a profit potential. Investment return and risk are cornerstones of any financial analysis. The required rate of return depends in part on how well these risks are understood and quantified. When the level of risk involved in an investment is higher, a higher rate of return is expected to be compensated for it.
Part 2
Based on data from Mergent, Abbott Laboratories has a beta of 0.98. On the other hand, Yahoo! Finance (n.d.) assigns Abbott laboratories a beta of 1.04. Beta, as a standard of measurement, has a value of 1. Below the beta of 1.0, a company is considered to be relatively immune to the effects of market fluctuations. Companies with a beta greater than 1.0 are more sensitive to shifts in the market, with sensitivity increasing or decreasing as beta deviates from 1.0. The market's beta equals 1.0, and both of Abbott's betas are close to this level. I will assume a Mergent beta of 0.98 for the purposes of this evaluation.
The capital asset pricing model relies on a company's beta to determine investment returns. "We need this model to put a number on how much of a return on investment an investor needs to feel comfortable with taking on the risk of making an investment." We need the risk-free rate (Rf), a risk premium (Rm), and the company's beta (B) to finish the equation. For the following CAPM calculation, we'll use Abbott Laboratories' beta of 0.98 in addition to a risk premium of 6.00% and a risk-free rate of 2.0%.
CAPM:
R = Rf + B (Rm)
R = 0.02 + 0.98 (0.06)
R = 0.02 + 0.0588
R = 0.0788 or 7.88%
In comparison to the big market cap discount rate of 10% utilized in the prior constant growth method, Abbott's predicted return rate of 7.88% for CAPM is slightly lower. Abbottbeta is just under the market rate of 1.0, suggesting that the company is less risky than the discount rate of 10% of companies with a big market capitalization.
Part 3
Before deciding whether to recommend a purchase, hold, or sell, the value of a company's shares must be determined. In this valuation, I will apply the CAPM solution at the needed rate of return and the low-end dividend growth rate to determine the fair market value of Abbott laboratories stock. The stock price is derived from the dividend expected in 2021 (D), the low-end growth rate (g), and the required rate of return (r). The formula for a constant growth rate is as follows.
Price= D (1+ g )/r −g)
These are the values that the equation takes: Rates of dividend increase for Abbott range from 6% to 8%. (g). In 2021, shareholders received a total annual dividend payment of $0.76 per share (D). Using the Capital Asset Pricing Model, Abbott Laboratories needs a return of 7.88% (r). The per-share value of Abbott Laboratories (NYSE: ABT) is determined to be $92.40 using the information provided. Below, you'll find the results of our calculations:
Price= 0.76 (1+0.06)/ (0.0788−0.06)
Price= 0.76 (1.06)/0.0188
Price = $42.85
Dividend growth rates between 6.0 and 7.0 percent are used in the second calculation in place...

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