Forecast financial statements and cash flows

Assignment Help Financial Accounting

Reference no: EM133327388

Micron Technologies Inc. Study the financials

Question 1. Estimate the WACC

a) Estimate the stock's beta using CRSP stock data (holding period returns) and Fama-French data (mktrf, rf) from WRDS. For the cost of equity using CAPM, use the computed beta, the estimated market return of 12%, and the most current risk-free rate.

b) If the firm issues dividends, determine if the dividend growth model is appropriate for the selected stock. If so, use the DGM to find the cost of equity.

c) If the CAPM and DGM are relatively close, then use the average of the two as your final cost of equity. If DGM cannot be used or is very different than the CAPM, default to the CAPM as the cost of equity.

d) Use whatever method you deem most appropriate to find cost of debt.

Question 2. Forecast financial statements, cash flows, and stock price

a) Download the last 5 years of 10-Ks for your firm from the SEC EDGAR database.

b) Use horizontal and vertical analyses to forecast the income statement and balance sheet for

10 years into the future. Use the forecasted statements to derive the future cash flows.

c) If the firm's sales growth is greater than your chosen terminal growth rate, ramp down the sales growth rate from year 6 to year 10 so that there's not a dramatic "slow down" when

the terminal growth rate is reached.

d) Use your chosen terminal growth rate to find the terminal value of the firm.

e) Discount free cash flows to present value (the enterprise value) using the estimated WACC as discount rate.

f) Subtract the firm's debt from the enterprise value to get equity value and determine the estimated stock price.

Question 3. Use Industry price-to-earnings, price-to-sales, price-to-free cash flow, and market-to-book equity ratios to estimate the stock price (see Financial Ratio Suite in WRDS), both contemporaneously and using the ratios to compute a terminal value.
4. Sensitivity analysis

a. The stock price is sensitive to the terminal growth rate and the WACC. Create a table to show how sensitive it is that has WACC on one axis and Terminal Growth rate on the other. In the table show the stock price associated with each WACC and terminal growth rate.

Reference no: EM133327388

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