Free Cash Flow Valuation
1. What is the intrinsic value of a publicly traded stock using the multi-stage free cash flow to equity (FCFE) approach (chapter 13)?
2. How does that compare to the current market price?
To determine the intrinsic value, begin by picking a stock from the list below these instructions. Information necessary to complete this assignment is available from many different sources: EDGAR, Yahoo/Finance, Bloomberg, Morningstar, DataSet, for instance.
Stragegy: Find the following values for the most recently reported year (2016):
· Total Revenue
· Capital Expenditures
· Working Capital
· Interest expense
To determine free cash flow to the firm assume the following parameters:
· Working capital is 15% of revenues.
· The tax rate is 30%.
· Net debt remains at 25% D/E or 20% D/A
· The T-bill or risk free rate is 2.5%
· Market risk premium is 8.0 percent.
These factors will remain unchanged in high and stable growth phases
High Growth Stage
During the five (5) year high growth phase, assume the following:
· Expected growth rate in EBIT, Capital Expenditures, Revenues, Working Capital and depreciation is 10.0%.
· Beta of the stock during this high growth period is 1.5. The cost of debt is 6.0% and the debt-to-equity ratio is 25% (D/A = 20%).
Stable Growth or Terminal growth Stage
For the stable growth phase, assume the following:
· Expected growth rate in EBIT and working capital is 3.0%.
· Beta of the stock during the stable growth phase is 1.
· Cost of debt is 6.5%
· Debt to equity ratio is 25%.
· Capital expenditures are offset by depreciation.
First determine the current free cash flow. Then grow the cash flows for 5 years using the high growth stage parameters. Find the terminal value using the stable growth stage parameters. Discount all values back to today.
How does the price you determined, compare to the current market price? What are some reasons for this difference?
Caterpillar (CAT), Microsoft (MSFT), United Technology (UTX), International Flavors and Fragrances (IFF), Tiffany (TIF), Clorox (CLX), Anheuser Busch In-Bev (BUD), Accenture (ACN), Starbucks (SBUX)
Low Stakes Writing Assignment: “Till it Happens to You” analytic summary
is a low stakes writing assignment. “Low Stakes” means that this paper will be graded either complete or incomplete (not gpa scale). This is an opportunity to practice skills you will display in your first midterm paper. Low stakes writing allows you to experiment with writing style, test ideas and generally take risks. I will give you written feedback on your submission via canvas.
-Observe 2 formal features of Lady Gaga’s “Till it Happens to You” video in detail. Without explicitly interpreting the video, critically report on the video’s features.
-Articulate specific details (mention minute:second where appropriate) in relationship to patterns in the video. Describe transitions and changes in the features you select. For instance, if you are summarizing clothing, compare the clothing at various moments in the video.
-Communicate your ideas clearly and engagingly. Structure your sentences and paragraphs to inspire reader interest in your observations.
2-3 double spaced pages. Times New Roman Font. 1″ Margins.
Upload .doc or .docx files to Canvas. (No .pages files)S
Devote approximately one page of writing per “feature,” ie. 1 page on sound, 1 page on camera angle.
Include a brief (2 sentence) introductory paragraph. Your introduction should anticipate the features you will discuss and why they are important. DO NOT contextualize the video/Lady Gaga’s career/feminism/rape culture/etc. Your only source for this assignment is the video itself.
Include a conclusion paragraph. You may use the following template or a similar phrasing of your own:
“Re-watching this music video, I noticed ___ details in __ and ___ features. Details like ___ are significant ___ because ___.”
In your conclusion you have to connect the observations you made about two different features. If you do so, you may use a template like:
“Considering ___ and ___ together, one wonders if ____.”