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Investment Management for Marathon Oil

In: Business and Management

Submitted By chengzhi09
Words 1996
Pages 8
Introduction This stock analysis paper is for Marathon Oil (MRO) which has been chosen because the oil and gas sector is in the throes of an energy revolution in the United States. With the endless opportunities offered by fracking and the possibility that the United States has become a net energy exporter again after many decades, the prospects for the oil and gas sector are indeed bright. Further, MRO is a midcap company meaning that it is neither too big nor too small which means that it is on the cusp of a transformation where it can ramp up its operations in a scalable and sustainable manner without affecting either its financials or its core operating principles. The following are the calculations of two different models, the CAPM and the DDM or the Dividend Discount Model.
CAPM= Rf + beta*(Rm-Rf), where Rf is the risk free rate, Rm is the expected market return and beta is the beta for the asset.
CAPM=8%+1.7*(1.7*8%-8%) =17.52%, where risk free rate=8%, beta=1.7, MCR=1.7*8%=13.6%
Under the DDM, Fair Value (P) = D/r-g, where D represents dividend paid, r represents discounting rate and g represents the expected dividend growth. The discounting rate is 13.6%, and the Fair Value=0.76/ (1.136-1.089) =16.17
Market Price = Expected Dividend Per Share + (Expected End of Year Price – Current Share Price)/ Current Share Price. Given the fact that Expected Dividend Per Share is 2.87, Expected End of Year Price is 45.3, and Current Share Price is 39.94, we get the Market Price using this model as 20.6.
Intrinsic Value = Expected Dividend Per Share + Expected End of Year Price/1+MCR we get the numerator as 48.17 which is divided by 1 + MCR which turns out to be 1.136. Thus, the Intrinsic Value is calculated as 42.40.
The Intrinsic Value using the Constant Growth Model yields the result as 42.26
All the data used in this stock analysis paper is from the EDGAR...

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