This is the first stock is Lowe’s Companies, Inc. (LOW) which will be in one file. The other 2 stocks will be AT&T Inc. (T). and Ford Motor Company (F) which will be in another file. 1. Estimate the discount rate for your stock In order to estimate the dividend discount and RIM valuation models, you will need a discount rate for your stock. a. Estimate the discount rate using the CAPM model with the equity beta in Valueline. You can assume that the 90-day TBill rate is 4% and that the stock market risk premium is 8%. b. Use your answer from 1a. as the discount rate for questions 2 and 3 only. You will need to calculate the Asset Beta and a different discount rate for question 4. 2. Estimate the value of your stock using the Constant Perpetual Growth Dividend Discount Model (DDM) You will need to collect the following data from Yahoo Finance from the “statistics” page for the stock. i. Current Stock Price ii. Return on Equity (ROE) iii. Diluted EPS iv. Book Value per share v. Trailing Annual Dividend Rate vi. Payout Ratio After collecting your Yahoo data, calculate the value of the stock using the constant growth DDM. Do your calculations in this order: a. Estimate the sustainable growth rate for the stock. b. Estimate the stock’s valuation using the constant growth DDM with the sustainable growth rate you calculated in 2a and the discount rate from Question 1a. It is possible that your answer will be negative. This would happen if the growth rate were greater than the discount rate. If that happens, simply explain that you could not estimate a value using this method. c. Using the constant growth DDM, solve backwards to get the growth rate by using the current stock price in Yahoo Finance (the price on the day you got the data). As a hint, using this method the growth rate will be less than the discount rate. d. Comment on your results and how they compare to the actual stock price. If the model did not work very well, explain why it may not have worked. 3. Estimate the value of your stock using the Residual Income Model. a. Using the Yahoo Finance data, estimate the value of each stock using the Residual Income Model. For the growth rate, use the answer that you solved backwards for in question 2c. For the discount rate, use the one you calculated in question 1a. b. Comment on your results and how they compare to the actual stock price. If the model did not work very well, explain why. 4. Estimate the value of your stock using the Free Cash Flow Model Using your Valueline data, calculate the value of your stock using the Free Cash Flow Model. Do your calculations in this order: a. To begin with, you need to calculate the Asset Beta. Use the Valueline report to get the Equity Beta, the LT-Debt to use as your estimate of debt, and the Market Cap as your estimate of equity. (Make sure that the debt and equity are in the same units, i.e. both are in $ millions or both are in $ billions.) You can assume that the tax rate is 21%. The reason you need to calculate the Asset Beta and recalculate the discount rate is because in the FCF Model you are valuing the entire firm (equity and debt) and not just the value of the stock. b. Estimate the discount rate using the CAPM model with the asset beta you calculated in Question 4a. You can assume that the 90-day TBill rate is 4% and that the stock market risk premium is 8%. c. For the FCFs, use the most current year of actual data, not Valueline’s estimated values (the ones that are bolded). For the growth rate, use the future year’s estimated growth rate given in Valueline (probably will be for years 2023-2025 or 2024-2026). This answer gives you the total value of the firm per share, i.e. the value of both equity and debt per share. d. Estimate the value of the equity per share for your final answer. You will need to calculate the debt per share first, and then subtract that from your answer in 4c to get the equity per share value. e. Comment on your results and how they compare to the actual stock price. If the model did not work very well, explain why. 5. Estimate the value of your stock using the Price Ratio Models. Using your Valueline data, calculate the value of your stock using the following 3 price ratios: price to earnings, price to cash flows, and price to sales. For the ratio calculations, use the most current year of actual data in Valueline. For the current price, use the current price you got from Yahoo Finance. For the growth rates, use the future year’s estimated growth rates given in Valueline (probably will be for years 2023-2025 or 2024-2026). Do your calculations in this order: a. Price to Earnings per share Ratio Estimate b. Price to Cash Flows per share Estimate c. Price to Sales per share Estimate d. Comment on your results and how they compare to the actual stock price. If the model did not work very well, explain why. 6. Final evaluation of the stock Using the estimates of value from Questions 2-5, draw a final conclusion about your stock. Did the models predict the stock’s current price in Yahoo very well? If not, does that imply that the current market price of the stock is over or under valued? If you truly believed in the model results you calculated, would you recommend a BUY rating on the stock or a SELL rating? You must choose BUY or SELL and explain why
