Course Project Part 7 Relative Valuation Using P/E and PEG Multiples, and DCF Valuation Using DCF Models.

Course ProjectPart 7Part 7
of the Course Project requires you to value your firm’s equity based on
Relative Valuation methods and Discounted Cash Flow valuation methods. Course
Notes IV and V; class discussions of these Notes plus Chapter 17 of your text are important
for Part 7.The purposes of Part 7 are to enhance your
knowledge of relative valuation and discounted cash flow valuation methods by
providing you experience and practice in using them.Course Project Part 7 Relative Valuation Using P/E and PEG
Multiples, and DCF Valuation Using DCF Models.Point Value: 40 points (an excellent
opportunity to boost your grade)Relative Valuation Method 1.Thisrequires:(1) You
to calculate your company’s P/E ratio; Q3 2013 1.07Q4 2013 1.19Q12014 2.08 Q2 2014 1.67(2) Identify
its peer/sector/industry companies; The three major competitors belong to the
same industry and same sector to which Apple Inc. is attached have been
selected and they are Blackberry, Google and Hewlett Packard, but as the PE of
the Blackberry is not available therefore the company has been excluded. The average PE of other two companies has
been used. (3) Calculate
the P/E ratio for the peer/sector/industry; (4) Value
your company’s stock using its earnings and the peer/sector/industry P/E; (5) And
then conclude whetheror notyour
company’s stock is over-valued, under-valued or properly valued.The value of the Apple Inc. is undervalued
as it is showing lower value as compared to the value calculated using the
competitors PE ratio. It is lower by
around 12%. Proceed as follows to obtain your company’s
P/E:1. Your
company’s earnings:a. Use
the Trailing Twelve Months (ttm) earnings per share. That is, EPS for Q3, 2014
+ EPS for Q2, 2014 + EPS for Q1, 2014 + EPS for Q4, 2013. 2. Your
company’s share price:a. Use
the average price for the month of November, 20143. Your
company’s P/E is derived by simply dividing the E from step 1 into the P from
step 2.4. Your
company’s peer/sector/industry companies. 5. Calculate
the P/E for the peer/sector/industry. Use either the median or mean P/E of the
group. 6. Value
your company’s stock using the EPS ttm and the median P/E for the
peer/sector/industry.Relative
Valuation Method 2 requires you to
calculate your company’s “PEG” ratio and to determine if its stock
price is over-valued, under-valued, or properly valued.Proceed as follows:1. 18.84/25.5
= 0.745. How
close is your company’s PEG ratio to 1? No
the company PEG ratio is less than 1 and it is around 74% of 1, it means that
the stock is undervalued.6. How
does the valuation in this part compare to that from Method 1?Under
this method the future growth of earnings has been considered while in the PE
valuation method, the current earnings of the company were considered. But the PEG ratio is more considerable as it
is based on future earnings and the investor would like to buy stock on the
basis of future earnings, not on the basis of past earnings. Discounted Cash Flow ValuationThe following are the basic background data
and information you need to estimate the DCF valuation for your firm’s stock
price.1. The
cash flow (s) to be discounted. Please note the following:A. If
your company pays a dividend and has long-term debt in its capital structure
then use a), b) and e) below as the cash flows in the DCF model.B. If
your company does not pay a dividend and has no long-term debt then use b), c)
and d) below. a) Dividends
per share.b) Earnings
per share.c) Operating
Cash Flow per share.d) Free
Cash Flow to the Firm per share.e) Free
Cash Flow to Equity per share.2. The
RAOCC for your firm to discount cash flow d) and the Required Return on Equity
to discount cash flows a), b), c) and e). This is from Course Project Part 6.10.57%3. Your
best estimate – supported by your research, – of the growth rate(s) of the cash flows you will use for both the five
year forecast horizon and the Terminal Value. Please discuss how you obtained
these.T4. It
is critical for this part of the Course Project to have thought and researched
long and hard about your company’s growth rate of cash flows. You need to
discuss your best estimate(s) of its cash flow growth rate(s) and cite the
research supporting your views. See
attached excel sheet for free cash flow to equity.5. State
whether you are using a No Growth/Perpetuity, Constant Growth Rate or Multi
Stage Growth Rate DCF Model, and the basis for your decision.I6. The
forecast horizon is the 5 years 2014 – 2018; the Terminal Value part of the
model starts in 2019.Now