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Course Project Part 7 Relative Valuation Using P/E and PEG Multiples, and DCF Valuation Using DCF Models.




Question;Course ProjectPart 7Part 7;of the Course Project requires you to value your firm's equity based on;Relative Valuation methods and Discounted Cash Flow valuation methods. Course;Notes IV and V, class discussions of these Notes plus Chapter 17 of your text are important;for Part 7.The purposes of Part 7 are to enhance your;knowledge of relative valuation and discounted cash flow valuation methods by;providing you experience and practice in using them.Course Project Part 7 Relative Valuation Using P/E and PEG;Multiples, and DCF Valuation Using DCF Models.Point Value: 40 points (an excellent;opportunity to boost your grade)Relative Valuation Method 1.Thisrequires:(1) You;to calculate your company's P/E ratio, Q3 2013 1.07Q4 2013 1.19Q12014 2.08 Q2 2014 1.67(2) Identify;its peer/sector/industry companies, The three major competitors belong to the;same industry and same sector to which Apple Inc. is attached have been;selected and they are Blackberry, Google and Hewlett Packard, but as the PE of;the Blackberry is not available therefore the company has been excluded. The average PE of other two companies has;been used. (3) Calculate;the P/E ratio for the peer/sector/industry, (4) Value;your company's stock using its earnings and the peer/sector/industry P/E, (5) And;then conclude whetheror notyour;company's stock is over-valued, under-valued or properly valued.The value of the Apple Inc. is undervalued;as it is showing lower value as compared to the value calculated using the;competitors PE ratio. It is lower by;around 12%. Proceed as follows to obtain your company?s;P/E:1. Your;company's earnings:a. Use;the Trailing Twelve Months (ttm) earnings per share. That is, EPS for Q3, 2014;+ EPS for Q2, 2014 + EPS for Q1, 2014 + EPS for Q4, 2013. 2. Your;company's share price:a. Use;the average price for the month of November, 20143. Your;company's P/E is derived by simply dividing the E from step 1 into the P from;step 2.4. Your;company's peer/sector/industry companies. 5. Calculate;the P/E for the peer/sector/industry. Use either the median or mean P/E of the;group. 6. Value;your company's stock using the EPS ttm and the median P/E for the;peer/sector/industry.Relative;Valuation Method 2 requires you to;calculate your company's "PEG" ratio and to determine if its stock;price is over-valued, under-valued, or properly valued.Proceed as follows:1. 18.84/25.5;= 0.745. How;close is your company's PEG ratio to 1? No;the company PEG ratio is less than 1 and it is around 74% of 1, it means that;the stock is undervalued.6. How;does the valuation in this part compare to that from Method 1?Under;this method the future growth of earnings has been considered while in the PE;valuation method, the current earnings of the company were considered. But the PEG ratio is more considerable as it;is based on future earnings and the investor would like to buy stock on the;basis of future earnings, not on the basis of past earnings. Discounted Cash Flow ValuationThe following are the basic background data;and information you need to estimate the DCF valuation for your firm?s stock;price.1. The;cash flow (s) to be discounted. Please note the following:A. If;your company pays a dividend and has long-term debt in its capital structure;then use a), b) and e) below as the cash flows in the DCF model.B. If;your company does not pay a dividend and has no long-term debt then use b), c);and d) below. a) Dividends;per share.b) Earnings;per share.c) Operating;Cash Flow per share.d) Free;Cash Flow to the Firm per share.e) Free;Cash Flow to Equity per share.2. The;RAOCC for your firm to discount cash flow d) and the Required Return on Equity;to discount cash flows a), b), c) and e). This is from Course Project Part 6.10.57%3. Your;best estimate - supported by your research, - of the growth rate(s) of the cash flows you will use for both the five;year forecast horizon and the Terminal Value. Please discuss how you obtained;these.T4. It;is critical for this part of the Course Project to have thought and researched;long and hard about your company?s growth rate of cash flows. You need to;discuss your best estimate(s) of its cash flow growth rate(s) and cite the;research supporting your views. See;attached excel sheet for free cash flow to equity.5. State;whether you are using a No Growth/Perpetuity, Constant Growth Rate or Multi;Stage Growth Rate DCF Model, and the basis for your decision.I6. The;forecast horizon is the 5 years 2014 ? 2018, the Terminal Value part of the;model starts in 2019.Now;="msonormal">="msonospacing">


Paper#51842 | Written in 18-Jul-2015

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