Reference no: EM132444219

Stock Valuation

The intent of this assignment is for you to demonstrate proficiency in determining the value of a stock. Stocks are used in financing businesses and are also a common security for personal investing purposes, so knowing how to determine the value has implications for both uses.

Instructions

There are many stock valuation models including the zero-growth model, constant-growth model, variable-growth model, free-cash flow valuation model, book value per share model and the liquidation value model. Many of these models require you to make assumptions about growth rates or dividend payments and some models have limitations on their use. For instance, the constant growth model requires that the dividend growth rate be constant and less than the investor's required rate of return. A relatively simple and popular model is the price/earnings multiple approach. Your assignment requires you to use this model to evaluate a stock. An illustration follows.

JetBlue Airways Corporation stock has an EPS that has ranged from a low of ($0.37) to a high of $0.36 per share in the past five years from 2006 to 2010. Based on this historical data and expected economic and industry conditions, let's assume that the expected EPS will be $0.20 per share going forward. The price earnings ratio of the industry can be obtained from various sources, such as Moody's, Standard & Poors (S&P) or Finance.Yahoo.com. A recent P/E for the industry was around 22. Based on these assumptions, JetBlue stock would trade at $0.20 x 22 or $4.40. A recent stock price as of the time of this analysis was $5, so this was a reasonable approximation.

Using the price/earnings multiple approach, calculate the stock price of a pubic company, preferably one in the aviation business and provide the following information:

1. Research the EPS for the past five years, including quarterly results from the current year. 
2. Estimate the future EPS.  Use this information along with research that you conduct from at least 2 articles about the company's recent financial performance (within the past year).  This information can be from the Wall Street Journal, New York Times, company press releases or other verifiable source.
3. Determine the industry P/E for the industry using either Moody's, S&P, Finance.Yahoo or by calculating the P/E for three competitor firms and using an average of the three values.
4. Calculate the expected price of the stock and compare this price to the most recent market price.
5. Explain any significant differences.