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Ten definitions of the value of a stock for Dr. Washington

Given that Dr. Washington wants to make stocks a major part of his investment portfolio, you decide to focus on how to analyze stocks. You decide to use a large U.S. industrial company, to demonstrate how to analyze stocks.

The research department has provided you with the following information regarding this company.

This year (2009), free cash flow is expected to reach $325 million.
In 2010, it is expected to reach $350 million.
2011, $400 million.
2012, $425 million
And 2013, $450 million.
The analyst has projected an intrinsic value for this stock of $65.00.

Dr. Washington is busy this week, so he asks you to send him an e-mail. Compose an e-mail that in addition to explaining the following information for the industrial company, which is a publicly traded company that trades on the NYSE, addresses the efficient market hypothesis, and how the analyst responsible for monitoring this stock has projected this intrinsic value for the company's stock.

52-week range: Hi 75 Lo 35
Current stock price: 50
Dividend Yield: 2.75%
Dividend per share: 1.375
P/E ratio: 20
Earnings per share: $2.50
Shares outstanding: 100 million
Market capitalization: $5 billion
Cost of capital: 9%
Growth rate of free-cash-flows beyond 2013: 3%
Assignment Guidelines:

Using the textbook, course materials, and Web resources, find the definitions for the ten values listed above in the Assignment Description.

In your own words, rewrite the definition for each of the ten values.
Demonstrate how to calculate the values using the information from the company's stock as an example.

Next, answer the following questions:
What is the efficient market hypothesis, and what is its relationship to stock valuation?
What is the free-cash-flow approach to valuing stocks?
Using the free-cash-flow approach, how did the analyst arrive at an intrinsic stock value of $65 for the company?
Compile your definitions, calculations, and your answers to the three questions above into a single Word document.

A Word document that contains your ten definitions of the values listed in the Assignment Description, your calculations of the ten values using the industrial company's stock information as an example, and your answers to the three questions listed in the Assignment Guidelines

Solution Preview

[Date]

Dear Dr. Washington:

The stock of the industrial company has a calculated intrinsic value of $65 based on my expectations and perceptions of the firm's true value with free cash flows for 2009, 2010, 2011, 2012, and 2013 expected to reach $325 million, $350 million, $4 with free cash flows for 2009, 2010, 2011, 2012, and 2013 expected to reach $325 million, $350 million, $400 million, $425 million, and $450 million, respectively.

Specifically, the above intrinsic value was computed from the expectations of the free cash flows for the company over its life, which includes it terminal value, then dividing these cash flows by the outstanding number of common shares.

52-week range. Within the last 52 weeks, or a year, the highest and lowest prices of the any given stocks traded in the exchanges are provided as part of the stocks' summary information. For the industrial company under consideration, the highest price is $75 while its lowest is $35 within the last 52 weeks.

Current stock price. This is the price the holders of the shares of stocks of the industrial company are willing to sell these shares. Currently it is $50.
Dividend per share. This ...

Solution Summary

The ten definitions of the value of a stock for Dr. Washington is examined.

$2.19