Marketing Report

VALUE MEASUREMENT

INTRODUCTION

The purpose of this report is to understand the Canadian stock market and valuing stock prices of the following six Canadian companies: Bank of Montreal, Toronto-Dominion Bank, Canadian Tire, Sears, Husky Energy, and Petrol Canada. We have used ten years of data to examine the prices of these six Canadian companies under the Security Market Line theory. The stock prices of these companies have been taken from Yahoo finance and MSN finance. The simple linear regression method was used to calculate risk premium and beta.

Bank of Montreal (BMO)

BMO Financial Group is one of the largest financial services providers in North America, offering comprehensive retail banking, wealth management and investment banking products, services and solutions.

According to the TSX historical data obtained from Yahoo Finance, the arithmetic method was used to average the returns of BMO stock at 5.19% (Exhibit 1) based on semi-annual prices during the 10-year period. The same method was also implemented to calculate the average of compensation prices of 4.02% (Exhibit 1). Besides the simple linear regression offered, the way of calculating beta, which equaled 0.5177 (Exhibit 1) less than 1, indicated the relatively low risk to the markets. Alpha 0.0311 (Exhibit 1) was also brought out after the entry of the point (4.02%, 5.19%) to the linear function y=a + 0.5177x (Exhibit 1). In addition, according to the formula RRR (Required Rate of Return), we could easily get the average RRR of BMO which is 3.58%.

Above all, compared to the average return of BMO, it was obvious that the RRR, 3.58% was lower than the average stock return on the TSX market, 5.19%. Therefore, the value of BMO stock was undervalued, which meant the benefit for investors gained was higher than their expectation.

Toronto-Dominion Bank

Toronto-Dominion Bank is the personal, small business and commercial banking operation of the Toronto-Dominion Bank offering a range of financial products and services to over 10 million customers throughout Canada through more than 1000 branches and 2700 ATMs.

From 1997 to 2007, the average returns of the TD stock were calculated as 6.22% (Exhibit 2) based on the semi-annual prices. Since both BMO and TD were from the TSX market, the average return on compensation should be treated as the same as the result we retrieved for BMO, 4.02% (Exhibit 2). Moreover, the beta of TD was 0.6757 (Exhibit 2) less than 1 but very similar to data of BMO 0.5177 which also demonstrated the lower risk than the average of the Market. Then Alpha was also figured out as 0.0351 by putting the point (4.02%, 6.22%) into the linear function y=a + 0.6757x (Exhibit 2). Lastly, we could easily work out the average RRR (Required Rate of Return) of TD, 3.86% (Exhibit 2) according to the formula RRR.

Overall, by comparing the average return of TD, it was obvious that the RRR, 3.86% was lower than the average stock return on the TSX market, 6.22%. Therefore, we could surely say that the value of TD stock was undervalued, which also implied the benefit investors gained was higher than their expectation.

Canadian Tire (CT)

Canadian Tire Corporation, Limited is one of the leading retailers in Canada. The company, aided by associate dealers, franchisees, and agents, operates the flagship Canadian Tire chain, which includes more than 450 stores from coast to coast. These stores offer a wide selection of automotive parts, accessories, and services; sports and leisure products; and household goods.

By the same method that was used for the two above stocks, the average return of the CT stock was 6.94% (Exhibit 3) based on semi-annual prices from 1997 to 2007. Canadian Tire as one of TSX stocks had the same average return on compensation prices, which was 4.02% (Exhibit 3). The beta was equal to 0.6366 (Exhibit 3) which revealed the lower risk than the risk of the whole TSX market. By inputting the point (4.02%, 6.94%) to the linear function y=a + 0.6366x, the alpha was numerated as 0.0438 (Exhibit 3). Then, according to the formula RRR (Required Rate of Return), the RRR of CT was worked out as 4.15%.

Ultimately, through the above analysis of calculation, it was manifest at a glance that the RRR of Canadian Tire, 4.15% was lower than the average stock return on the TSX market, 6.94%. Therefore, the value of CT stock was certainly undervalued, which meant the benefit investors gained was higher than their expectation.

Sears

Sears, Roebuck and Co., a wholly owned subsidiary of Sears Holdings Corporation (NASDAQ: SHLD), is a leading broad line retailer providing merchandise and related services.

We used the arithmetic method to the average returns of the stock 5.14% based on the semi-annual prices during the 10-year period. Using the same method as above, we get average of compensation prices of 4.02%. The beta for Sears is 1.01 and the risk free rate is 1.16%. Since the beta for Sears is 1.01 that is close to 1, the risk of Sears is approximately equal to market risk. Also, according to the formula of RRR (Require Rate of Return), we get