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
