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 cu
ent 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= XXXXXXXXXXfor 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/~adamoda
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:
esearch.stlouisfed.org/fred2/series/DGS10
Use the cu
ent 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/BondCente
, 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 cu
ent 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 cu
ent free cash flow, remember to not include change in short term debt in calculating change in cu
ent liability and not including cash & ST investment in calculating change in cu
ent 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 cu
ent 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 cu
ent market capitalization of the company (say within 15% margin of e
or)? 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 cu
ent 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 cu
ent 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 cu
ent 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 cu
ent 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
eport 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
efo
e 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,
i
=
RF
+
RP
m
*
i
The
m
arket risk premium (RP
m
) can be derived from cu
ent 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/~adamoda
New_Home_Page/datafile/implpr.html
,
use
“
Implied
Premium (FCFE)
”
in 2018
as our market risk premium.
The
eta
for a company is already provided by
yahoo finance
on its summary page.
For risk free