Estimate value of your company stock

Reference no: EM132297906

Assignment: Securities Analysis

Company: General Motors Company

Valuation Assignment ( 4-5 pages )

Purpose of this section of the paper is to estimate value of your company's stock by the FCFF and FCFE methods. Then comparing the market price, you make a recommendation.

A. The Beta from your regression in Assignment #4 is only a preliminary estimate. You need to compare it with the Beta from other reports, and make adjustments if necessary.

B. Re-calculate the required rate of return (kcs) based on the new Beta. Don't forget we already got risk-free rate and expected market return in HW#4. Be sure to use your values to replace those in the template.

C. Calculate the weighted average cost of capital (WACC). If your company has preferred shares,

WACC = wd[kd(1-t)] + wpskps + wcskcs

Where wd, wps, wcs are the percentage weights of debt, preferred stock and common stock in the capital structure.kd, kps, kcs are costs of debt, preferred stock and common stock. t is tax rate.

If your company has no preferred shares, WACC = wd[kd(1-t)] + wcskcs

Cost of debt can be estimated as interest rate paid on debt. Cost of preferred stock can be estimated as kps = Dps/Pps, where Dps is the dividend per preferred share, and Pps is the market price per preferred share. If your company does not offer preferred shares, set wps to zero.

Note: You can assume the cost of common stock (kcs) to remain the same if the company's capital structure (debt/equity) remains stable. Otherwise, you will forecast debt/equity and then deleverage beta and releverage beta to calculate cost of common stock for each year. (These are built into the Excel template)

D. Now that we have all discount rates available. The next steps are to get FCFFs or FCFEs in the future. We already have free cash flows projected for immediate stage (next 5 years) from HW#3. Next, assume the growth rate of FCFFat the beginning of the transitional is equal to the immediate stage average. Then you decide the growth rates at the end of the transitional stage (the terminal growth rate). Finally you use the linear interpolation to set annual growth rates for the rest of years in the transitional stage so you have a gradual and smooth declining growth rate towards the maturity. Based on your growth rate assumptions of FCFF or FCFE, forecast the cash flows.

E. Estimate the terminal firm value (if using FCFF) or terminal equity value (if using FCFE) by using the constant growth model. The FCFFs are discounted by the WACC, while the FCFEs are discounted by kcs.

F. Once the intrinsic value of firm is estimated, you subtract value of Debt (and value of preferred stock if any) to get the total value of common equity. After dividing total outstanding shares from the total value of common equity, you will get the value per share. Similarly, if you use FCFE approach, you discount future FCFEs at the cost of equity kcs, and sum them up to get the total value of common equity. After dividing total outstanding shares, you will get the value per share.

G. Use the Excel free cash flow template (either sales based approach or valueline approach) to complete your work. Discuss your estimates from FCFF model, and make any adjustments if necessary, and reach your conclusions with current stock price. Based upon your result, what recommendation you will make for this stock?

Do not forget to provide in appendices:

• The Value Line report or your estimation process of FCFF and FCFE

• The Excel tables showing future cash flows you use to calculate

• Other reference and reports you used for your analysis

Reference no: EM132297906

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