Business Case

Abstract

This study is using the simultaneous screen selection method (the aggregate Z-score approach) to pick a stock which has outperformed in the industry. To compare the methods of computing cost of equity, CAPM approach, APT approach, equity risk premium approach are used. When evaluating the null hypotheses, t-tests were used for the analysis. What I need to point out is that the APT model doesn't work for Marriott stock (MAR). Overall, see the results of cost of equity (Ke) derived by different approach as below,

Ke CAPM-60 monthly Ke CAPM-250 daily Ke APT Risk premium approach

10.21% 9.40% -1.44% 6.69%-7.69%

This is the annual cost of equity

The target industry was narrowed into hotel industry. NYSE, AMEX, NASQAQ were chosen as the searching exchanges. All the data for the stock selection were from the Bloomberg Terminal (which follows the International Industry Classification Standard). What I need to point out is that the total number of hotel companies list in the tree exchanges is small. Typically it's good to pick out 15 companies for each industry, but due to the nature of hotel industry, only 8 companies could be found. Only 8 companies came out after the stock screening. By computing the Z-scores for each company, Marriot became the first company to meet the company selection criteria which ranked 2nd out of 8 hotels on the Z-score list. The five factors and aggregate Z-score will be explained in the following contexts.

A/R turnover, P/E, and ROE are prevalent ratios which are commonly used to measure the financial health of companies. A/R turnover can be used to determine if a company is having trouble collecting credit sales. The higher the turnover, the faster the business is collecting its receivables. As the nature of high credit sales, A/R turnover is an important ratio to hotel Companies. P/E ratio is a popular ratio for valuation evaluation, it measures how much money the investors pay for each dollar they earn from the company. For the lon...