Project – Part 2

Total of 70 points for Undergraduates and 110 points for Graduate Students

The purpose of Part 2 of the Project is to value the stock you selected in Part 1 of the project using the models we learned in Chapter 6.  Answer the questions for your stock and SHOW YOUR WORK! Clearly show your different inputs and their source (i.e. Equity Beta 1.2, long-term debt of \$4 billion, from Valueline, etc.) and then your calculations.  You can either type the answers or write out your answer if it is clear and legible and then scanned. Remember that graduate students must complete the project for 3 stocks.

Undergraduates only need to do the project for 1 stock.  If undergraduates wish to earn up to 20 points of extra credit, you can complete the project for 2 more companies.  You should upload your stock valuation for the one stock you listed in Project #1 assignment using the Project Part 2 link.  Use the separate Extra Credit link to upload your 2 extra credit stock valuations.

1. Estimate the discount rate for your stock

In order to estimate the dividend discount and RIM valuation models, you will need a discount rate for your stock.

1. Estimate the discount rate using the CAPM model with the equity beta in Valueline.   You can assume that the 90-day TBill rate is 4% and that the stock market risk premium is 8%.
2. Use your answer from 1a. as the discount rate for questions 2 and 3 only.  You will need to calculate the Asset Beta and a different discount rate for question 4.
• Estimate the value of your stock using the Constant Perpetual Growth Dividend Discount Model (DDM)

You will need to collect the following data from Yahoo Finance from the “statistics” page for the stock.

1. Current Stock Price
2. Return on Equity (ROE)
3. Diluted EPS
4. Book Value per share
5. Trailing Annual Dividend Rate
6. Payout Ratio

After collecting your Yahoo data, calculate the value of the stock using the constant growth DDM.  Do your calculations in this order:

1. Estimate the sustainable growth rate for the stock.
2. Estimate the stock’s valuation using the constant growth DDM with the sustainable growth rate you calculated in 2a and the discount rate from Question 1a.  It is possible that your answer will be negative.  This would happen if the growth rate were greater than the discount rate.  If that happens, simply explain that you could not estimate a value using this method.
3. Using the constant growth DDM, solve backwards to get the growth rate by using the current stock price in Yahoo Finance (the price on the day you got the data).  As a hint, using this method the growth rate will be less than the discount rate.
4. Comment on your results and how they compare to the actual stock price.  If the model did not work very well, explain why it may not have worked.
• Estimate the value of your stock using the Residual Income Model.
1. Using the Yahoo Finance data, estimate the value of each stock using the Residual Income Model.  For the growth rate, use the answer that you solved backwards for in question 2c.  For the discount rate, use the one you calculated in question 1a.
2. Comment on your results and how they compare to the actual stock price.  If the model did not work very well, explain why.
• Estimate the value of your stock using the Free Cash Flow Model

Using your Valueline data, calculate the value of your stock using the Free Cash Flow Model.  Do your calculations in this order:

1. To begin with, you need to calculate the Asset Beta.  Use the Valueline report to get the Equity Beta, the LT-Debt to use as your estimate of debt, and the Market Cap as your estimate of equity.  (Make sure that the debt and equity are in the same units, i.e. both are in \$ millions or both are in \$ billions.) You can assume that the tax rate is 21%.  The reason you need to calculate the Asset Beta and recalculate the discount rate is because in the FCF Model you are valuing the entire firm (equity and debt) and not just the value of the stock.
2. Estimate the discount rate using the CAPM model with the asset beta you calculated in Question 4a.  You can assume that the 90-day TBill rate is 4% and that the stock market risk premium is 8%.
3. For the FCFs, use the most current year of actual data, not Valueline’s estimated values (the ones that are bolded).  For the growth rate, use the future year’s estimated growth rate given in Valueline (probably will be for years 2023-2025 or 2024-2026).  This answer gives you the total value of the firm per share, i.e. the value of both equity and debt per share.
4. Estimate the value of the equity per share for your final answer.  You will need to calculate the debt per share first, and then subtract that from your answer in 4c to get the equity per share value.
5. Comment on your results and how they compare to the actual stock price.  If the model did not work very well, explain why.
•  Estimate the value of your stock using the Price Ratio Models.

Using your Valueline data, calculate the value of your stock using the following 3 price ratios: price to earnings, price to cash flows, and price to sales.  For the ratio calculations, use the most current year of actual data in Valueline.  For the current price, use the current price you got from Yahoo Finance.  For the growth rates, use the future year’s estimated growth rates given in Valueline (probably will be for years 2023-2025 or 2024-2026).

Do your calculations in this order:

1. Price to Earnings per share Ratio Estimate
1. Price to Cash Flows per share Estimate
1. Price to Sales per share Estimate
1. Comment on your results and how they compare to the actual stock price.  If the model did not work very well, explain why.
• Final evaluation of the stock

Using the estimates of value from Questions 2-5, draw a final conclusion about your stock.  Did the models predict the stock’s current price in Yahoo very well?  If not, does that imply that the current market price of the stock is over or under valued?  If you truly believed in the model results you calculated, would you recommend a BUY rating on the stock or a SELL rating?       You must choose BUY or SELL and explain why.

1. Create a document (Word or pdf) with your answers.  Be sure to show calculations and what inputs you used.  Give a full explanation for any written questions.
2. This should then be UPLOADED into Blackboard using the link for Project Part 2.
3. If you are an undergraduate and decide to do two more valuations for extra credit, upload those extra credit documents using the separate Extra Credit link in Blackboard.
4. Graduate students should just upload all of their files into the Project part 2 link.  You can upload multiple files into Blackboard at once.  Just click on Browse again and again to upload more files BEFORE clicking submit.

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