Assignment in the file
Project Chapter 14 Project Purpose of the project: 1. Estimate a firm’s cost of equity 2. Estimate a firm’s WACC 3. Estimate a firm’s intrinsic value using the DCF model Report: 1. Starts early as it takes a lot of time, the project is due Saturday July 20th 11:45 pm 2. One to two pages report that reports the findings of the project, include cost of equity, WACC, and intrinsic value. Try to explain clearly what you did as well as address the questions asked in the project. 3. Attach the excel spreadsheets that show the data and estimation work. Project Detail Determine the stock for the project We are going to use the DCF model to estimate the intrinsic value, thus it’s important that you choose a company with a positive free cash flow, ideally from a traditional industry. I suggest that you choose the company from the S&P 500 list, the list of companies is available in the following link, you can also find the company’s ticker symbol there: http://en.wikipedia.org/wiki/List_of_S&P_500_companies, since we did an example in class using google, google should not be selected. You can email me the company you’d like to work on before you start, so I can check to make sure it is appropriate, I would stay away from banks and companies like Amazon. Part I. Estimate the firm’s WACC at the end of year 2018 A. Estimate a firm’s cost of equity The cost of equity is estimated using the CAPM model, ri = rRF + RPm* bi The market risk premium (RPm) can be derived from current S&P 500 index value and forecasted cash flows on the index (based on analyst consensus of growth rate) using the free cash flow model, for detail on the approach, read paper on http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2409198 for detail, page 67-68 provides easy to understand examples. Using this methodology, you can find the updated market risk premium on http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/implpr.html, use “Implied Premium (FCFE)” in 2018 as our market risk premium. The beta for a company is already provided by yahoo finance on its summary page. For risk free rate, we use the 10 year Treasury bond rate as proxy. The 10 year treasury bond rate can be found at Federal Reserve website: http://research.stlouisfed.org/fred2/series/DGS10 Use the current rate as risk free rate. The number is already reported as percentage, so for example 2.3 means 2.3%. B. Estimate cost of debt You can search for a company’s bond information on this website: http://finra-markets.morningstar.com/BondCenter/, for debt/asset class, choose corporate, then search company’s name in Issuer Name. For companies with multiple bonds, pick the bond with about 10 year maturity and use its yield to maturity as the interest rate. For some bonds the yield is provided, if it is a bond you want to use but the yield is not provided, you can use Par Value as 100 to calculate the yield to maturity. C. Estimate WACC For simplicity case, we assume the company’s target structure consists of only debt and equity. To figure out the weight of equity and weight of debt, use the company’s current market capitalization on yahoo finance as the value of equity, and use total liability on balance sheet as the value of debt. Use 40% as tax rate. Remember the units on the financial statements are in thousands while the market capitalization information on the front page can be in billions, so you will have to convert the units to make them comparable. Part II. Estimate the Intrinsic Value of the firm Similar to the in class example of google, we are going to use Yahoo Finance to find all the relevant information for the valuation need and use the free cash flow model to figure out the intrinsic value. Please provide two estimated intrinsic values using both approaches to calculate terminal value (TV). You are going to use the financial statements to figure out the company’s current free cash flow, remember to not include change in short term debt in calculating change in current liability and not including cash & ST investment in calculating change in current assets. You can get depreciation and capital expenditure information from cash flow statement. Use the “growth est” under “analyst estimation” tab for next 5 years as the growth rate and forecast period. Use the WACC we estimate earlier as the WACC we are going to use. For terminal value (TV) calculation, if using constant growth model for TV, assume 3 to 4% constant growth rate after 5 years. If using the multiplier approach, use the current PE ratio of the company as the comparable PE ratio for simplicity purpose. Use total liability as the market value of debt. Part III. Analyze the results Question 1. Is the result you get close to the current market capitalization of the company (say within 15% margin of error)? Which method of TV calculation gives you the closest results? Question 2. If the estimated value (using the constant growth rate approach for TV) is not close to the current market capitalization. Try the following: keep the PE ratio, adjust the growth rate to get close results, what growth rate you need to use in order to make the estimated value closer to the current market capitalization? Is the growth rate realistic given the company’s growth rate for the past 5 years and past year? Question 3. If the estimated value (using the constant growth rate approach for TV) is not close to the current market capitalization. Try the following: adjust the constant growth rate to get close results, what constant growth rate you need to use in order to make the estimated value closer to the current market capitalization? Chapter 14 Project Purpose of the project: 1. Estimate a firm’s cost of equity 2. Estimate a firm’s WACC 3. Estimate a firm’s intrinsi c value using the DCF model Report: 1. Starts early as it takes a lot of time, t he project is due Saturday July 2 0 th 11:45 pm 2. One to two page s report that reports the findin gs of the project, incl ude cost of equity , WACC , and intrinsic value. Try to explain clearly what you did as well as address the questions asked in the project. 3. Attach t he excel spreadsheets that show the data and estimation work. Project Detail Determine the stock for the project We are going to use the DCF model to estimate the intrinsic value, thus i t’s important that you choose a company with a positive free cash flow, ideally from a traditional industry . I suggest that you choose the company from the S&P 500 list, the list of companies is available in the following link , you can also find the company’s ticker symbol there : http://en.wikipedia.org/wiki/List_of_S&P_500_companies , since we did an example in class using google, google should not be selected. You can email me the company you’d like to work on befo re you start, so I can check to make sure it is appropriate , I would stay away from banks and companies like Amazon . Part I. Estimate the firm’s WACC at the end of year 2018 A . Estimate a firm’s cost of equity The cost of equity is estimated using the CAPM model, r i = r RF + RP m * b i The m arket risk premium (RP m ) can be derived from current S&P 500 index value and forecasted cash flows on the index (based on analyst consensus of growth rate) using the free cash flow model, for detail on the approach, read paper on http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2409198 for detail, page 67 - 68 provides easy to understand example s . Using this methodology, you can find the updated market risk premium on http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/implpr.html , use “ Implied Premium (FCFE) ” in 2018 as our market risk premium. The beta for a company is already provided by yahoo finance on its summary page. For risk free