Assume CNA Financial Corporation provides the following footnote to its 2011 10-K report.
Valuation of investments:
CNA classifies its fixed maturity securities (bonds and redeemable preferred stocks) and its equity securities as either available-for-sale or trading, and as such, they are carried at fair value. Changes in fair value of trading securities are reported within net investment income. The amortized cost of fixed maturity securities classified as available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity, which are included in net investment income. Changes in fair value related to available-for-sale securities are reported as a component of other comprehensive income. Investments are written down to fair value and losses are recognized in Realized investment gains (losses) on the Consolidated Statements of Operations when a decline in value is determined to be other-than-temporary.
The following table provides a summary of fixed maturity and equity securities.

Summary of Fixed Maturity and Equity Securities
December 31, Cost or Gross Gross Estimated
2011 Amortized Unrealized Unrealized Fair
(in millions) Cost Gains Losses Value
Fixed maturity securities available-for-sale
U. S. Treasury and obligations-
of government agencies $122 $16 $1 $137
Asset-backed:
Residential mortgage-backed 6,254 101 265 6,090
Commercial mortgage-backed 994 40 41 993
Other asset-backed 753 18 8 763
Total asset-backed 8,001 159 314 7,846
States, municipalities and-
political subdivisions 8,157 142 410 7,889
Foreign government 602 18 -- 620
Corporate and other bonds 19,492 1,603 70 21,025
Redeemable preferred stock 47 7 -- 54
Total fixed maturity securities-
available-for-sale 36,421 1,945 795 37,571
Total fixed maturity securities-
trading 6 -- -- 6
Equity securities available-for-sale:
Common stock 90 25 -- 115
Preferred stock 332 2 9 325
Total equity securities-
available-for-sale 422 27 9 440
Total $ 36,849 $ 1,972 $ 804 $38,017

Required:
(A) At what amount does CNA report its investment portfolio on its balance sheet? In your answer identify the portfolio’s fair value, cost, and any unrealized gains and losses.
(B) How do CNA’s balance sheet and income statement reflect any unrealized gains and/or losses on the investment portfolio?

a) Securities are reported at historical cost. Gains and losses are recognized upon sale of the securities.
b) Securities are reported at market value. Unrealized gains and losses on AFS (Trading) securities are recorded in accumulated other comprehensive income (net income).
c) Securities are reported at market value. Only unrealized losses are recognized in net income. Unrealized gains are deferred and recognized upon sale of the securities.
d) ecurities are reported at market value. Unrealized gains and losses are recognized currently in net income.

(C) How do CNA’s balance sheet and income statement reflect gains and losses realized from the sale of
available-for-sale securities?

a) Gains and losses realized from the sale of securities are recognized in current income. The company records an accounting (reclassification) adjustment in the AOCI account to reflect the elimination of previously recorded unrealized gains and losses.
b) Gains and losses realized from the sale of securities are recognized in current income. The company records an accounting (reclassification) adjustment in retained earnings to reflect the elimination of previously recorded unrealized gains and losses.
c) Gains and losses realized from the sale of securities are recognized in current income. The company records an accounting (reclassification) adjustment in cash and cash equivalents to reflect the elimination of previously recorded unrealized gains and losses.
d) No entry is required as the securities are currently reported at market value and all unrealized gains and losses are reflected in current income. The market value changes bypass the income statement.

Sabrina gupta, an investment advisor with a major brokerage firm, was examining wal-mart stores, inc. (wal-mart) stock and its valuation. gupta wondered whether to recommend the stock to any of her new clients or to existing clients who did not currently have wal-mart in their portfolios.her key task was to use an intrinsic value approach to price the shares and to then compare the resulting price with the price at which the stock was traded in the market. gupta wanted to use alternative valuation methods and assumptions to produce intrinsic value estimates for wal-mart stock.she was interested in seeing if the alternative methods would point to a consensus regarding the valuation of the stock and to see if the valuations suggested an investment opportunity given the current market price. methods she contemplated to use were: multi-stage growth modelprice earnings multiplemost valuation methods gupta considered required a common set of inputs: future cash flows to wal-mart investorsgrowth rate of future cash flowsdiscount factor or required rate of return by wal-mart investorsgupta gathered data to determine each of the above.gupta thought that dividends to wal-mart shareholders would adequately capture the cash flows to wal-mart shareholders; she also thought that this approach would simplify her task and she would revisit more complex valuation models if she felt the need.gupta thought that capm would provide her a relatively reliable estimate of the required rate of return. capm based required rate of return can be estimated by using a risk free rate, systematic risk of the firm and equity market risk premium. gupta thought that in a valuation exercise that involve long term cash flows, 10-year government bond yield would be an appropriate risk free rate of return estimate. she checked the 10 year note rate and found out that it was about 3.68%. gupta searched for wal-mart beta in bloomberg. bloomberg estimates betas by regressing the s& p 500 returns on the firm returns over the past two years and arrives at a “raw” beta estimate. bloomberg makes an adjustment in raw beta based on some academic research. gupta is confident that bloomberg adjustment is justified and she uses wal-mart beta estimate of 0.66 in her analysis.while gupta is aware of the importance of emrp assumption, she thinks that bloomberg’s historical estimate of 5.05% is a safe assumption. she is aware of the fact that some studies suggest a larger risk premium of approximately six per cent, while others suggest a much lower forward-looking premium of less than four per cent. she is mindful of the arbitrariness of her assumption, and she takes a note to revisit this issue if her valuations produce unreasonable estimates.anticipated dividend growth (g) is often estimated in a variety of ways.first, observed historical dividend growth can be assumed to continue in a perpetual fashion.second, future dividend growth can be estimated on the basis of recent estimates of analysts.gupta noted that the consensus annual wal-mart dividend for fiscal year 2011 was $1.21, and one respected analyst had estimated the expected constant dividend growth (in perpetuity) at approximately 3%.as the chart suggests, both earnings and dividend growth rates are declining but they seem to be higher than the “respected analyst’s” estimates. gupta decides to use several alternative perpetual growth assumptions to see the impact on price. since gupta decided to use variants of dividend discount model (ddm), she checked the anticipated earnings for 2011. analyst’s estimates suggested $4.10 earnings per share. gupta decided to use 10% growth rate from 2011 to 2012 and assumed a steady decline to 3% in 13 years (until 2024) where the perpetual growth rate of 3% resumes. she also assumed that walmart will increase its dividend payout ratio from 30% to 55% from years 2012 to 2024. you are asked to reproduce gupta’s analysis of multi-stage growth model and double check her valuation by using an earnings multiple. you have all the data you need to conduct the multi stage discounted growth model analysis, but you will need to do some research about the multiples valuation.