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Cyberproblem on Stock Valuation




Cyberproblem on Stock Valuation;In this cyberproblem, you will value the stock for Emerson Electric, a scientific and technical instrument;company. While stock valuation is obviously important to investors, it is also vital to companies engaging;in a merger or acquisition. Here, the process of stock valuation can often be quite subjective. Frequently;the opposing sides of a merger or acquisition will have vastly differing opinions of a firms value.;For example, in 1994, part of AT&Ts purchase of McCaw Cellular called for AT&T to acquire McCaws;52 percent stake in LIN Broadcasting and purchase the remaining 48 percent at its fair value. LINs;advisor's valued the stock at $162 a share, while AT&T estimated its value at $100 a share. The difference;resulted in a whopping $1.6 billion. As this example demonstrates, stock valuation seems to be both art and;science.;In this cyberproblem, you will use the dividend growth models constant growth assumptions to value;Emersons stock. In addition, you will apply the concepts of risk and return by estimating the stocks;required return from the CAPM model. In order to arrive at a value for Emerson Electric, you will gather;and use information from a variety of sources, including and;;a.;First, you need to find an estimate of the risk-free rate of interest, r RF. For this cybeproblem, use; to find the 10-year Treasury bond rate, and use this interest rate as the risk-free;rate. For this purpose, go to then click on Market Data and then click on;Rates and Bonds.;In addition, you also need a value for the market risk premium. However, r M is not directly observable.;It can be estimated using index returns or consensus analyst estimates, but may not be entirely;accurate. However, studies indicate that historically, the market risk premium ranges from 4% to 8%.;For this cyberproblem, we will use an assumed market risk premium of 7.0%.;b.;Find an estimate of Emerson Electrics beta using Reuters website, found at;Use Reuters stock symbol lookup function to get Emersons stock symbol. When you are on Emerson;Electrics page then look for the companys beta.;c.;From data gathered in Parts a and b, use the CAPM model to determine Emerson's required return.;d.;Identify Emersons current annual dividend and 5-year dividend growth rate. Use Reuters to go to;Emerson Electrics page then choose Stocks: Financial Highlights to find this information.;e.;The fundamental valuation of any financial asset is the present value of all its anticipated future cash;flows. For this reason, the current dividend does not interest us as much as the next annual dividend;does. Calculate Emerson's next expected annual dividend, D1.;f.;Assuming a constant growth rate, use the DCF model to determine the expected price of one share of;Emerson Electric stock.;g.;Compare Emersons expected value with its current market price. You can use Reuters to obtain;Emersons current stock quote.;h. Use the firms 1-year dividend growth rate and 3-year growth rate to calculate the DCF intrinsic value.;Upon completing this, discuss how changes in the market risk premium and required return would;affect our intrinsic value estimates, and what assumptions might the market be making to affect its;current stock price.;i.;Attach copies of the websites from which you extracted the data for this Cyberproblem and highlight;such data.


Paper#28244 | Written in 18-Jul-2015

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