INSTRUCTIONS: ADD BEAUTIFUL COVER PAGE
Similarity report should be less than 10%
See the Purdue Owl link to proper use of APA
https:
owl.purdue.edu/owl
esearch_and_citation/apa_style/apa_style_introduction.html
Write a 4 page paper (1,200 or more words) in APA format. Below is a recommended outline.
1. Cover page (See APA Sample papers in www.apastyle.org OR https:
owl.english.purdue.edu/owl
esource/560/01/)
2. Introduction
a. A thesis statement
. Purpose of pape
c. Overview of pape
3. Body (Cite sources with in-text citations.)
4. Conclusion – Summary of main points plus Lessons Learned and Recommendations
5. References – List the references you cited in the text of your paper according to APA format.
(Note: Do not include references that are not cited in the text of your paper)
Support all assertions with proper scholarly research, using at least 5 references (scholarly articles published in peer-reviewed academic journals). Proper APA formatting is expected (cited sources, cover page, reference page, etc.). Your submission should be presented in the form of a business document. Presentation counts!
Submit a two-page double spaced paper summarizing for your boss your analysis and valuation with a few
ief summary exhibits explaining how your analysis and outlook are quantified in your valuation model. Would you recommend investing in the company? Why or why not?
Research Paper 3: As a new junior analyst for your firm, your first assignment is to research, analyze, and value Johnson & Johnson stock (NYSE listed). Your boss recommends determining prices based on both the discounted cash flow method and comparable P/E ratio method. You are concerned about your boss’s recommendation because your Corporate Finance professor explained that these two valuation methods can result in widely differing estimates when using real data. You are hoping the two methods will reach similar prices. Good luck with that!
Your assignment is:
1. Find and download the Johnson & Johnson 2019 Annual Report including Form 10-K for fiscal year ending December 29, 2019.
2. Go to Reuters (http:
www.reuters.com) and enter the symbol for Johnson & Johnson (JNJ) in the search box at the top of the web page (select Johnson & Johnson JNJ). From the Reuters website collect the following information (you should be able to find this in the free sections) and enter it into an Excel spreadsheet:
a. The cu
ent stock price (last trade – upper left of page)
. The EPS (TTM)
c. The number of shares outstanding
d. The Industry PE Ratio (TTM) – you may need to look elsewhere for this.
3. From the Key Metrics tab scroll down to find the Revenue Growth Rate (5Y), enter the number in your spreadsheet.
4. Go to Morningstar (http:
www.morningstar.com) and enter “JNJ” into the “Search Quotes and Site” box. Select Johnson & Johnson under the U.S. Securities section. Under "Financials" click Income Statement. Copy and paste (or use “Export to Excel to create anew file) the most recent three years XXXXXXXXXXof income statements into a new worksheet in your existing Excel file. Repeat this for the balance sheets and the cash flow statements for Johnson & Johnson. Keep (or copy) all the different financial statement data in the same Excel worksheet NOTE: Make sure you are collecting the Annual data, NOT the Quarterly data.
5. To determine the stock value using the discounted cash flow method:
a. Forecast the free cash flows. Start by using the historical data from the financial statements downloaded from Morningstar to compute the three-year average of the following ratios:
i. EBIT/Sales
ii. Tax Rate (income tax expense/income before tax)
iii. Property, plant & equipment/Sales
iv. Depreciation/property, plant & equipment
v. Net working capital/sales
. Create an empty timeline for the next five years
c. Forecast future sales based on the most recent year’s total revenue growing at the LT growth rate (5Y average) from Reuters for the first five years of the forecast.
d. Use the average ratios from step 5. a. above to forecast EBIT, property plant & equipment, depreciation, and net working capital for the next five years.
e. Forecast the the free cash flow for the next five years using Eq. 10.2 from the text (Section 10.1 in text).
f. Determine the horizon enterprise value for year 5 using Eq. 10.6 and a long-term growth rate of 4% and a cost of capital of 11% for JNJ.
g. Determine the enterprise value of the firm as the present value of the free cash flows.
h. Determine the stock price using Eq XXXXXXXXXXNote: your enterprise value is in thousands of dollars and the number of shares outstanding Is in billions.
6. To calculate an estimate of the JNJ price based on a comparable P/E Ratio, multiply the industry average P/E ratio by JNJ EPS.
7. Compare the stock values from both methods to the actual stock price.
Fundamentals of Corporate Finance, Fourth Edition
Fundamentals of Corporate Finance
Fourth Edition
Chapter 11
Risk and Return in Capital Markets
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Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved.
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Chapter Outline
11.1 A First Look at Risk and Return
11.2 Historical Risks and Returns of Stocks
11.3 The Historical Tradeoff Between Risk and Return
11.4 Common Versus Independent Risk
11.5 Diversification in Stock Portfolios
Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved.
2
Learning Objectives
Identify which types of securities have historically had the highest returns and which have been the most volatile
Compute the average return and volatility of returns from a set of historical asset prices
Understand the tradeoff between risk and return for large portfolios versus individual stocks
Describe the difference between common and independent risk
Explain how diversified portfolios remove independent risk, leaving common risk as the only risk requiring a risk premium
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3
11.1 A First Look at Risk and Return
Consider how an investment would have grown if it were invested in each of the following from the end of 1925 until the end of 2015:
Standard & Poor’s 500 (S&P 500)
Small Stocks
World Portfolio
Corporate Bonds
Treasury Bills
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4
Figure 11.1 Value of $100 Invested at the End of 1925 in U.S. Large Stocks (S&P 500), Small Stocks, World Stocks, Corporate Bonds, and Treasury Bills
Source: Global Financial Data and CRSP.
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Realized Returns, in Percent (%) for Small Stocks, the S&P 500, Corporate Bonds, and Treasury Bills, Year−End 1925–1935
Table 11.1 Realized Returns, in Percent (%) for Small Stocks, the S&P 500, Corporate Bonds, and Treasury Bills, Year−End 1925–1935
Year Small Stocks S&P 500 Corp Bonds Treasury Bills
1926 −7.20 11.14 6.29 3.19
1927 25.75 37.13 6.55 3.12
1928 46.87 43.31 3.38 3.82
1929 −50.47 −8.91 4.32 4.74
1930 −45.58 −25.26 6.34 2.35
1931 −50.22 −43.86 −2.38 1.02
1932 8.70 −8.86 12.20 0.81
1933 187.20 52.89 5.26 0.29
1934 25.21 −2.34 9.73 0.15
1935 64.74 47.21 6.86 0.17
Source: Global Financial Data.
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6
11.2 Historical Risks and Returns of Stocks (1 of 5)
Computing Historical Returns
Realized Returns
Individual Investment Realized Returns
The realized return from your investment in the stock from t to t + 1 is:
(Eq. 11.1)
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7
Example 11.1 Realized Return (1 of 4)
Problem:
Microsoft paid a one-time special dividend of $3.08 on November 15, 2004. Suppose you bought Microsoft stock for $28.08 on November 1, 2004, and sold it immediately after the dividend was paid for $27.39.
What was your realized return from holding the stock?
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8
Example 11.1 Realized Return (2 of 4)
Solution:
Plan:
We can use Equation 11.1 to calculate the realized return. We need the purchase price ($28.08), the selling price ($27.39), and the dividend ($3.08) and we are ready to proceed.
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Example 11.1 Realized Return (3 of 4)
Execute:
Using Equation 11.1, the return from Nov 1, 2004, until Nov 15, 2004, is equal to:
This 8.51% can be
oken down into the dividend yield and the capital gain yield:
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10
Example 11.1 Realized Return (4 of 4)
Evaluate:
These returns include both the capital gain (or in this case a capital loss) and the return generated from receiving dividends. Both dividends and capital gains contribute to the total realized return—ignoring either one would give a very misleading impression of Microsoft’s performance.
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11
Example 11.1a Realized Return (1 of 4)
Problem:
Elite Health Management paid a one−time special dividend of $10.00 on March 2, 2017. Suppose you bought Elite Health Management stock for $20.33 on Fe
uary 15, 2017 and sold it immediately after the dividend was paid for $10.29.
What was your realized return from holding the stock?
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12
Example 11.1a Realized Return (2 of 4)
Solution:
Plan:
We can use Equation 11.1 to calculate the realized return. We need the purchase price ($20.33), the selling price ($10.29), and the dividend ($10.00) and we are ready to proceed.
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13
Example 11.1a Realized Return (3 of 4)
Execute:
Using Equation 11.1, the return from Fe
uary 15, 2017 until March 2, 2017 is equal to
This −0.2% can be
oken down into the dividend yield and the capital gain yield:
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14
Example 11.1a Realized Return (4 of 4)
Evaluate:
These returns include both the capital gain (or in this case a capital loss) and the return generated from receiving dividends. Both dividends and capital gains contribute to the total realized return—ignoring either one would give a very misleading impression of Elite Health Management’s performance.