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Question: part 1 equity analysis 14 marks charter hall real estate...

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Part 1 Equity Analysis (14 marks) 

Charter Hall Real Estate Investment Trust (CQE) runs shopping centers which are used for all sorts of retail requirements. These are both in cities and more rural centers, with shops which range from everyday shopping (Woolworths and Coles), electronics stores such as JB Hifi and Harvey Norman, to boutique fashion and accessory sellers. Using the last 5 years of monthly data, CQE has a beta of 0.86 compared to the ASX200. The risk-free interest rate is 1.5% and the expected rate of return on the market is 9% p.a. CQE had a closing price today of $2.45. It paid its last dividend yesterday and is expected to pay a dividend of $0.18 in exactly one year’s time. 

  1. What do investors expect the stock to sell for at the end of the year (one year from now) if they believe in the CAPM? According to this valuation is it under, over, or fairly valued?(3 marks)
  2. An analyst has forecast the following for CQE: Due to the coronavirus, dividends will grow at 1.3% for the next three years, after which they are expected to grow at 3.4% forever. If the required cost of equity for the firm is 9.5%, in the absence of any debt, what is the current value of the firm according to the two-stage DDM? (4 marks)
  3. What does the beta of 0.86 tell you about the sensitivity of CQE cashflows when compared to those of the ASX200? Why do you think this might be the case? (2 marks)
  4. Give an example of a defensive and a cyclical stock. What kinds of beta’s would you expect for these firms, why? (2 marks)
  5. AQR is setting up a new real estate investment trust very similar to that of CQE, except they are going to fund their investments with 50% debt and 50% equity. Given CQE had no debt, assuming similar underlying investments, and a borrowing rate of 2%, which investment do you expect will have higher risk? Higher beta? (2 marks)
  6. CQE pays out 100% of its cashflows as dividends. AQR is thinking about retaining 50% of earnings to invest in new, high-yield properties. Which firm do you anticipate will have a higher terminal growth rate? Why? (1 mark)
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