This is an internet exercise. Be sure to answer all questions. I would like you to do the following:
Go to finance.yahoo.com (Links to an external site.). Select a company of your choice, and enter the company’s ticker in the box at the top and click Search. If you do not know the ticker, simply start typing the company name in the box and you can select the ticker.
Show all work for any math asked for below!
Please make a post with answers to the following questions: Companies to choose from PENN gaming/ Walmart/ Goldman Sachs/Best Buy
What is the company’s forward dividend (this is the annual dividend expected next year), and the dividend yield? (see Forward Dividend and Yield). Note: If your company has no dividend (N/A), select another company!
What is your company’s current share price? What has been the trading range of the stock’s price over the last year? (use the 52 Week Range to answer)
What was the company earnings per share over the past twelve months? (see EPS (ttm) = trailing twelve months))
Click on Analysts in the horizontal menu bar just below the stock price.Under Earnings Estimate, how many analysts provide an earnings estimate for next year?
Now, scroll down to EPS Trend. What is the consensus estimate, among those analysts, of EPS for next year?
Finally, scroll to the bottom to Growth Estimates. What is the analysts’ consensus estimate of growth for the next 5 years for your company?
Now, click on Statistics in the horizontal menu bar just below the stock price.What is your company’s return on equity? (Search for “Return on Equity”) Note: If your company’s ROE is negative or greater than 100%, go to morningstar.com; enter your ticker in the box at the top and hit enter. On the horizontal bar across the middle of the screen, click on “Operating Performance”. Look at the return on equity data in the middle of the screen and look for the “5-yr” average. If that ROE is less than 50%, use it. If that ROE is over 50%, then use the “index” ROE just to the right of the 5-year average.
What is your company’s payout ratio? (Search for “Payout Ratio”) Note: If your company’s payout ratio is negative or greater than 100%, do the following. Take the Forward Dividend from Q1, and divide it by the EPS estimate next year from Part 2 of Q4. This will hopefully give you a payout ratio based on normalized earnings.
Given your answers to the previous two questions, what is your estimate of the company’s sustainable growth rate?
How does the sustainable growth rate you calculated in the previous question compare with the consensus analysts’ forecast for the next 5 years from part 3 of Q4?
What is your company’s beta? (Search for beta) Note: We will discuss beta in Module 6. In that module, we will use this beta to estimate a required return (the r variable) for a particular company. For now, just note that beta is a measure of a company’s stock risk; beta 1 means greater than average risk.
Now, go here (Links to an external site.) to get the current the 3-month Treasury yield (note that the values are percents, so a value of 2.05 is actually 2.05%). Multiply your beta from the previous question by 8.5% (the MRP, again, to be discussed in Module 6) and add to that product to the 3-month Treasury yield to get an estimate of r for your company. If your calculated estimate is less than 8%, then use 8% What is that estimate? (Should be a %)
Finally, compute the stock’s value using a two-stage dividend discount model using the following assumptions: 1) Use the forward dividend from Q1 as an estimate of D1), Use the estimate of g from the analyst’s estimate (part 3 of Q4) as the growth rate in the first stage of 4 years (so you will need to grow the dividend for 4 years to get D2-D5 using D1 as the first year dividend), use a constant growth rate of 4% (the high end of US long-term GDP growth) as the growth rate in the second stage, and use the r estimate from Q6 for the discount rate. Show your calculator inputs here.
How does your value estimate in #8 compare to the current share price (over or under)?