FIN 321 Valuation Project

Your team assignment is on blackboard

Select a company that pays a dividend from the list.

1. Define the Industry, product and/or services sold)

2. Identify the participants

  • Three largest competitors
  • buyers
  • suppliers
  • substitutes

3. For the past 5 years, what has been the relationship between GDP and the firm’s revenue growth? Compare percent change in GDP and percent change in revenues.

4a. Applying regression analysis, determine the stock’s beta.  Use Yahoo to get your adjusted close stock prices for the past 36 months. Calculate your returns, and the S&P 500 returns from  http://us.spindices.com/indices/equity/sp-500. Select the Additional Information Tab thenMonthly and Annual returns. This should give you an excel spread sheet

4b. Determine the required return on equity for your stock for the next 12 months. Project the appropriate 10 year treasury rate as the RF rate. Historically, market risk premiums ranged between 4.5-5.5% but you may choose a different premium as long as you justify your decision.

5. Calculate the growth in earnings for the past 5 years

  • Looking at the change in earnings from year to year
  • Applying the equation g =ROE x b (ROE = E1 / BV0)
  • Calculate the sustainable growth rate implied by the DDM Model. (Implied growth- Reverse DDM.  Assuming the stock is correctly priced at the close on Friday October 24, 2016, given its required return in according with the CAPM apply the DDM to calculate the sustainable growth rate implied by the model.) Calculate the average growth for each method over the past 5 years? Is the average relevant? Why?
  • Recommended a sustainable growth rate looking forward. Justify

Assumptions:

  • The above inputs are valid
  • The firm will begin growing at a sustainable rate 5 years from today
  • Book Value of Debt = Market Value of Debt
  • The relationship of Total debt/ Equity on the books is the firm’s target capital structure

Open Factset Click on the looking glass and enter @RG   (quick report)

This will open up a window

Enter your stock symbol in identifier and click REPORT GALLERT top left. This will bring up a list of reports on the right. Choose a report and click finish. You can select income statement, balance sheet, cash flow reports

  1. Calculate COGS, Depreciation, EBIT and CAPEX as a % sales for 2011-2015            Calculate interest expense as a % of sales.
  • Calculate the Operating Cash flow for the latest fiscal year
  •  Calculate the FCF for the latest fiscal year
  • Calculate the value of the firm based on an assumption that the CF will begin growing at a sustainable rate 5-years from today
  • What should the value of equity equal, given the value of the firm
  • Is the stock correctly priced, explain

Sources:

  • Please footnote each source (number) and attach a bibliography or a webliography. Do not just include a general web site. Be page specific, site title of article the author and date were applicable.

For this one, the company I choose is GLASXOSMITHKLINE (GSK).

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