INVESTMENT ANALYSIS USING THE PRAGMATIC MULTIPLIER APPROACH Developments In Business Simulation & Experiential Exercises, Volume 17, 1990 220 INVESTMENT ANALYSIS USING THE PRAGMATIC MULTIPLIER APPROACH John R. Wingender Oklahoma State University ABSTRACT This paper describes a fundamental analysis research project used in an MBA Investments course. The project requires the students to use a top-down approach with a dividend valuation model. The students first choose a stock, then they must calculate an expected return for the stock market, for the stocks industry and for the stock. The objective of the exercise is for the students to learn the important elements of fundamental analysis. INTRODUCTION The fundamental analysis approach seeks to calculate the intrinsic value of a stock from publicly available economic information and to compare the derived value of the firm to its current market price. The students calculate the price for which the stock should sell one year from today, the dividend it should pay and calculate a holding period return. The holding period return is equal to the price at the end of the year, minus the price at the beginning of the year, plus the dividends for the year divided by the beginning price. MODEL The specific model used in this project i5 the Pragmatic Multiplier Model. The P/F ratio is also known as the multiplier (M), thus M= P/E. This expression can be rearranged for finding the price of stock: P = M * E. Thus, substituting terms gives P = P/E *E. This approach uses a modified form of the Gordon Model for constant growth of dividends to calculate the expected future P/E ratio. For the students, the main part of the project is to determine what economic data are needed in the analysis, to find where the data are available and to perform the analysis on the data. PROCEDURE First, the students estimate the earnings per share for the company for the next year. Then the future P/E ratio must be calculated using equation 1. The first step requires the preparation of a pro forma income statement. The procedure entails forecasting the next year’s Sales, Gross Profit Margin (GPM), depreciation levels and the effective tax rate to calculate the expected earnings per share. The estimate of the multiplier calls for forecasts of the expected dividend payout (DPO = D/E) ratio, the required rate of return (k), and the growth rate (g). Each of these components is broken down into several mini-factors. The paper details the factors. For example, an average of the past dividend payout ratios would indicate an estimate for the next period. After each component is estimated, the future P/E is calculated. The estimated P/E is multiplied by the estimate of the earnings per share for the firm to calculate the future price of the firm’s stock. The expected return is then calculated. In the critical evaluation, the student would recommend that the stock be purchased if its expected rate of return is greater than it’s required rate of return. CONCLUSION This project has been very helpful in getting the students to think about the security analysis process. This project requires individual students to locate actual financial statement information in the Library, to record the information, to sort through the vast amount of information for only the specific data that are needed, and to think about how the data are used in the security evaluation process. The exercise often brings together much of the information they have learned in their previous years of’ study. It encompasses aspects of their studies in economics, accounting, quantitative methods, and finance on one particular assignment. I frequently hear from my students that a lot of their previously studied material makes more sense after the project. One thing that they unanimously recommend is for the project to be required in future classes. Table of Contents Volume 17, 1990 The Impact of Decision Support Systems on the Effectiveness of Small Group Decisions - Revisited The Relationship Between Financial Performance and Other Measures of Learning on a Simulation Exercise Use and Effectiveness of an Analogy-Based Expert System Suggestions for Computerized Business Authors Dealing with Power: An Experiential Exercise Using Movie and Personal Diary Analysis Techniques A Model for Developing Student Skills and Assessing Outcomes Through Outdoor Training Computer-Aided Exercises Versus Workbook Exercises as Learning Facilitator in the Principles of Marketing Course An Exposition of Guilford's Si Model as a Means of Diagnosing and Generating Pedagogical Strategies in Collegiate Business Education Formal Planning and Simulation Team Performance: A Cross Sectional Approach Cases: Real Organizations in Real Time in the Classroom An Empirical Investigation of the Internal Validity of Marketing Simulation Game An Empirical Evaluation of the Pedagogical Value of Playing a Simulation Game in a Principles of Marketing Course Factors Affecting Effective Teaching of Strategic Planning: Some Preliminary Evidence An Experiential Exercise for Learning About the Relationship Between Organizational Form & the Project Management Process Accounting Communication Skills can be Taught in the Auditing Course Modeling Cost Functions in Computerized Business Simulation: An Application of Duality Theory and Sheppard's Lemma A Life Cycle Analysis of Decision Making for a Strategic Management Team What's the Problem? A Dynamic Model for Teaching Problem Solving Skills Experientially International Currency Fluctuations: Money$im, A Simulation Superstores: A Specialized Retailing Simulation Within a Specialized Marketing Curriculum Factors Affecting Student Perceptions of Learning in a Business Policy Game VC + EL = VL The Name Game: An Experiential Exercise in Intergroup Relations The Effects of Experiential Accounting Work Experience on Student Performance in Intermediate Accounting Courses The Results of Using the Experiential Activity Group Performance Evaluation in a Business Policy Setting Using a Legal Database to Describe the Legal Environment of Marketing (and Business) Matching Environmental Uncertainty and Organizational Configuration An Instructional Computer Simulation of Tampering in QC Executive Evaluation of Student Learning in the Looking Glass Simulation Group Personality Composition and Total Enterprise Simulation Performance An Expert System for Selecting Analytical Techniques for Analyzing Marketing Research Data Effects of Cognitive Styles on Responses in an In-Basket Simulation A Psychometric Analysis of Kolb's Revised Learning Style-Inventory Selecting and Developing Experiential Exercises Using Movies Application of a Real-World Strategic Management Model in the Classroom Demand Equations which Include Product Attributes Consumption as the Objective in Computer-Scored Total Enterprise Simulations The Effects of Decision Format and Evaluation on Simulation Performance, Decision Time, and Team Cohesion The Effects of Computer Related Assignments on Student Performance in Business Administration The Money Game: A Dynamic Simulation Including Random Shocks for Money and Banking Courses Methods for Evaluating Performance on Business Simulations: A Survey The Effects of Synergogy on the Policy Course: Significant Improvements in Student Learning and Teacher Evaluation Conditions and Outcomes of Trust in a Two-Person Bargaining Exercise Bankgame Enhancing Computer Business Simulation with the Use of VGA Graphics An Experiential Approach to Entrepreneurship An Advanced Simulation Method (ASM) for Multiple Objective Problems The Influence of Experiential learning Techniques on Student Recognition of Non-Primary Learning Styles Negotiating Mergers and Acquisitions: A Cocktail Napkin Approach Identification of Unintended Effects in Experiential Laboratory Exercises An Experimental Comparison of Paper and Pencil and Computer Aided Decision Support Tools Porting a Simulation from the IBM World to the Macintosh World A Transaction Cost Analysis of Experiential Learning The Development of Experiential Exercises for Courses in Entrepreneurship and Small Business Management The Assessment Center as and Experiential Classroom Exercise Pricing Strategy Algorithms for Playing Business Simulations Organizational Structures for International Operations: An Experiential Activity Simulation Emphasis in the Business School Capstone Course An Integrated Approach to Computerizing the Business Curriculum Cross-Cultural Business Negotiations Exercise Organizational Socialization and Gender Differences in Students at Work Understanding Student Work Experience: A Content-Analytic Approach Introducing Executive MBA Programs with Management Games An Analysis of Improvement in Business Decision Outcome with Sequential Use of Two Simulation Games Teaching Business Policy Utilizing Mass Lecture and Individual Case Labs Potholes Along the Road to Evaluating Learning Outcomes: The Case of Outdoor Management Training Experiential Learning for Interior Design Students: Using CADD, Lotus 1-2-3, and Wordperfect Cognitive Learning Using a Computer-Based, Qualitative Interactive Business Simulation Sex Discrimination: Does the Woman get the Job or Does the Best Man Win? A Search for Visual Aids to Support Experiential Learning Through the 1990's An Experimental Analysis fo the Effectiveness of Student Role-Playing in Sales Training How to Have Students Learn from their Term Projects Self-Evaluation Exercise (SEE): An Assessment of Class Contribution A Study of the Influence of Team Formation on Attitudes and Performance in Management Games A Hardware Based CIM Simulation Laboratory Model Test Substance Abuse in Organizations Micro Computer Training Models Teaching Forecasting, Cash Budgeting and Inventory Model Building Using SBTools A Comparison of the Effects of Experiential Learning Activities and Traditional Lecture Classes An Adjunct Writing Instruction Assistant, The Computer; With an Illustration Classroom Software for ABC Analysis Utilizing Information Processing Technology to Enhance the Business Policy Simulation Experience Progressive Cases Realistic Job Previews Vs. Traditional Job Previews: Experiencing the Differences and Understanding the Consequences Investment Analysis Using the Pragmatic Multiplier Approach A Computer Simulation Interface for Competitive and Firm Analysis Self-Assessment of Ethical Decision Making Predispositions Preparing Managers for Overseas Assignments An Inquiry into Japanese Marketing: Workshop on Teaching Japanese Marketing The Performance Appraisal Feedback Interview: A Role Play for Human Resources Management Teaching Counselor Selling techniques Using Experiential Techniques to Teach International Topics International Management Simulation Gaming: Current Status and Future Developments A Realism Comparison of Simulation Technologies/Methodologies A Time-Efficient Game to Illustrate Concepts Taught in Management Courses and Management Development Programs Teaching the Management of Technology The Concept of Face and the Applicability of Experiential Exercises in an Oriental Culture's