What is the free-cash-flow approach to valuing stocks

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Reference no: EM131497940

Assignment: Investment analysis

Given that Dr. Bueller wants to make stocks a major part of his investment portfolio, you decide to focus on how to analyze stocks. You decide to use a large U.S. industrial company, to demonstrate how to analyze stocks.

The research department has provided you with the following information regarding this company.

• This year (2009), free cash flow is expected to reach $325 million.
• In 2010, it is expected to reach $350 million.
• 2011, $400 million.
• 2012, $425 million
• And 2013, $450 million.

The analyst has projected an intrinsic value for this stock of $65.00.

Dr. Bueller is busy this week, so he asks you to send him an e-mail. Compose an e-mail that in addition to explaining the following information for the industrial company, which is a publicly traded company that trades on the NYSE, addresses the efficient market hypothesis, and how the analyst responsible for monitoring this stock has projected this intrinsic value for the company's stock.

• 52-week range: Hi 75 Lo 35
• Current stock price: 50
• Dividend Yield: 2.75%
• Dividend per share: 1.375
• P/E ratio: 20
• Earnings per share: $2.50
• Shares outstanding: 100 million
• Market capitalization: $5 billion
• Cost of capital: 9%
• Growth rate of free-cash-flows beyond 2013: 3%

Assignment Guidelines

• Using the textbook, course materials, and Web resources, find the definitions for the ten values listed above in the Assignment Description.
• In your own words, rewrite the definition for each of the ten values.
• Demonstrate how to calculate the values using the information from the company's stock as an example.
• Next, answer the following questions:

o What is the efficient market hypothesis, and what is its relationship to stock valuation?
o What is the free-cash-flow approach to valuing stocks?
o Using the free-cash-flow approach, how did the analyst arrive at an intrinsic stock value of $65 for the company?

• Compile your definitions, calculations, and your answers to the three questions above into a single Word document.

Your submitted assignment must include the following:

• A 3 page Word document (body of paper) that contains your 10 definitions of the values listed in the Assignment Description, your calculations of the 10 values using the industrial company's stock information as an example, and your answers to the 3 questions listed in the Assignment Guidelines.

Reference no: EM131497940

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