Reference no: EM132411316

BFIN 4227 - Investment Analysis - Seton Hall University

Part I. Constant Growth Dividend Discount Model

You expect Seton Venture to have a ROE of 15%, a beta of 1.2, an expected earnings per share (E1) of $1.68, and a stable dividend payout ratio of 42%. The expected market risk premium is 10%, and the 10-year Treasury note yield is 1.8%.
a) Calculate the intrinsic value estimate of Seton Venture stock (V0) according to the constant growth DDM.
b) Calculate the Present Value of Growth Opportunities (PVGO).
c) Calculate the justifiable forward P/E and trailing P/E according to the constant growth DDM.
d) If the expected ROE for Seton Venture has been revised downward from 15% to 13%, recalculate the V0, PVGO, and the justifiable forward P/E and trailing P/E. Discuss whether these changes in V0, PVGO, and the justifiable forward P/E and trailing P/E are consistent with the concepts that we learned from class.

Part II. Multiple-Stage FCFE Model

Troy is preparing a valuation of Logistic Solutions using a multiple-stage FCFE valuation model with the following estimates. The FCFE per share for the current year is $1.80. The FCFE is expected to grow at 16 percent for the next three years, then at 10 percent annually for the following five years, and finally at a constant growth rate of 6 percent starting the ninth year. Logistic Solutions' estimated beta is 1.35, and Troy believes that the current market conditions dictate a 1.8% risk free rate and a 12% expected market return.
The following are five independent questions.
a) Given Troy's assumptions and approach, estimate the value of a share of Logistic Solutions.
b) If the terminal growth rate is projected to be 7%, rather than 6%, re-estimate the value of a share of Logistic Solutions. Does this new estimate make sense?
c) If the expected market return is assumed to be 9%, rather than 12%, re-estimate the value of a share of Logistic Solutions. Does this new estimate make sense?
d) If the systematic risk coefficient (beta) of the stock increases from 1.35 to 1.50, re-estimate the value of a share of Logistic Solutions. Does this new estimate make sense?
e) If Logistic Solutions' estimated beta is statistically insignificant, suggest an alternative approach to arrive at the required rate of return (k) on the stock and use this new k to re-estimate the value of a share of Logistic Solutions. Assume Logistic Solutions' bonds outstanding are traded at a yield of 6.1% and the risk premium required for Logistic Solutions' equity shareholders over bond holders is 4.5%.

Part III. Equity Valuation Analysis using Bloomberg:

Provide a relative valuation analysis for ONE of the following stocks:
NETFLIX (Ticker: NFLX)
Cisco (Ticker: CSCO)
Costco Wholesale Corp (Ticker: COST)
Procter & Gamble (Ticker: PG)
Verizon Communications ((Ticker: VZ)

We will refer to the chosen stock as "the stock" in the questions below.

a) Use the RV (relative valuation) function in Bloomberg equity analysis to compile a peer group for the stock you are analyzing.

b) Compile a relative valuation table that includes the following statistics for the stock and its peers:
• Five price multiples: P/E, P/B, P/S, P/CF, EV/EBIDTA
• Four Fundamental factors: Five-year EPS growth, Return on Equity (ROE), Beta, Net Profit Margin (PM)
• Other Information: Closing Price, Market Cap, Sales Revenue, EPS, Debt to Equity Ratio, Dividend Yield, Dividend Payout Ratio

c) Compare the P/E, P/B and P/S of the stock against the average P/E, P/B and P/S of the peer group. Discuss whether this is justified by the fundamental factors.

d) State your recommendation (Buy, Sell, Hold) on the stock based on the relative valuation analysis above.

e) Identify two major limitations of the above analysis. Suggest what and how additional information could help you make a better decision on this relative valuation case.

Consider Discounted Cash Flow (DCF) analysis on the stock.

f) Which DCF model (DDM, FCFE or FCFF) would you use to value the stock? Justify your DCF model choice using historical data on the dividend payout ratio and debt to equity ratio of the stock over the last five-year period.

g) Assuming the DCF model choice from f), determine the discount rate that you will use to discount the future cash flows. Using resources from Bloomberg, explain in details how you have arrived at this discount rate estimate.