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You are a new analyst for a large brokerage firm....




You are a new analyst for a large brokerage firm. You are anxious to demonstrate the skills


you learned in your MBA class and prove that you are worth your attractive salary. Your


first assignment is to analyze the stock of the General Electric Corp. Your boss


recommends determining prices based on both the dividend-discount model and discounted


free cash flow valuation methods. The expected return on a new investment is 12%.


However, you are a little concerned because your finance professor has told you that these


two methods can result in widely differing estimates when applied to real data. You are


really hoping that the two methods will reach similar prices. Good luck with that!


1- Go to Yahoo! Finance ( and enter the symbol for General


Electric (GE). From the main page for GE gather the following information and enter it


onto a spreadsheet:


a. The current stock price (last trade) at the top of the page


b. The current dividend amount, which is in the bottom-right cell in the same


box as the stock price.


2- Next click on \"Key Statistics\" from the left side of the page. From The Key Statistics


page gather the following information and enter it on the same spreadsheet:


a. The number of shares, of stock outstanding


b. The Payout ratio


3 .Next click on \"Analyst Estimates\" from the left side of the page. From the Analyst


Estimates page find the expected growth rate for the next 5 years and enter it onto your


spreadsheet. It will be near the very bottom of the page.


4. Next click on \"income Statement\" near the bottom of the menu on the left. Place the


cursor in the middle of the income statement and right-click. Select \"Export to Microsoft


Excel.\" Copy and paste the entire three years of income statements into a new worksheet in


your existing Excel file. Repeat this process for both the balance sheet and cash flow


statement for GE. Keep all the different statements in the same Excel worksheet.


5. To determine the stock value based on the dividend-discount mode:


a. Create a timeline in Excel for five years.


b. Use the dividend obtained From Yahoo! Finance as the current dividend to


forecast the next 5 annual dividends based on the five-year growth rate.


c. Determine the long-term growth rate based on GE\'s retention ratio and the return on


new investment.


d. Use the long-term growth rate to determine the stork price for year five


(using dividend discount model)


e. Determine the cost of equity using the CAPM model. (note: use to get the beta of the stock. Assume risk free rate =


3% and market risk premium = 7%.


f. Determine the current stock price using (using dividend discount model)


6. To determine the stock value based on the discounted free cash flow method:


a. Forecast the free cash flows (for seven years) using the historic data from


the financial statements downloaded From Yahoo! To build your forecast, compute


the three-year average of the following ratios:


i. EBIT /Sales


ii. Tax Rare (Income Tax Expenses /Income Before Tax)


iii. Property Plans and equipment/Sales


iv. Depreciation Expenses/ Property Plans and Equipment


v. Net Working Capital /Sales


b. Create a timeline for the next seven years


c. Forecast future sales based on the most recent year\'s total revenue growing


at the five year growth rate from Yahoo for the firs five years and the longterm


growth rate for years six and seven


d. Use the average ratios computed in pare (a) to forecast EBIT, Property


Plans and Equipment, depreciation, and net working capital for the next


seven years.


e. Forecast the free cash flow for the next seven years




f. Calculate the WACC by calculating the weights of debt and equity and the cost


of debt and equity.


To Calculate the weights: determine the amount of debt and equity,


calculate the total capital (sum of debt and equity), then, calculate the weights


of debt and equity.


To calculate the cost of debt, calculate the after tax cost of debt using the


information on (note: you should search by the


company name \"GENERAL ELECTRIC CO\"). Assume a marginal tax rate of 30%.


Cost of equity is determined based on the CAPM model (as in 5-e)


g. Determine the value of the firm based on discounted free cash flow


h. Determine the value of equity by subtracting long term debt from the firm




i. Determine the stock price


7. Compare the stock prices from the two methods to the actual stock price. What


recommendations can you make as to whether clients should buy or sell General


Electric\'s stock based on your price estimates?


8. Explain to your boss why the estimates from the two valuation methods differ.


Paper#5423 | Written in 20-Dec-2015

Price : $25