Company Valuation project - as part of a project, I am required to provide a financial Valuation of a Company using the valuation methods below. This is an Australian Company "Hills Industries" full details can be found at http://www.hills.com.au
I require assistance and help with these valuations, to allow me to write up a report on the company and to learn from the method used:
I need help with the following:
? The working out for each valuation method below and answers with calculations behind each valuation method. (if possible in a excel file so that I can review the method used) Plus a brief explanation of each method and results (so that I can them review the method and understand then and to expand and write a full report)
The only information given is the excel file attached hills.xls and suggested viewing of the annual reports for 2004 and/or 2003... also attached.
Any questions can be asked to me, via email at email@example.com
Company Valuation - methods
Using fundamental analytical techniques
1. Dividend Discount Model + justifications (approx 1 page Double spaced)
a. Constant Growth model + explanation (300 words approx)
b. Differential Growth model + explanation (300 words approx)
Note a: How to apply Constant Growth Dividend Discount Model?
Step 1: Compute the beta of the stock
a) using regression
b) using spread sheet (Excel) - see illustration spreadsheet
Step 2: Look for a risk-free rate. Go to the website of Monetary Authority, such as RBA, to look for the yield of Treasury Bills (3-month) or Government Bonds
Step 3: Calculate the return of local stock market - by computing the average return of the Stock Index, such as AOI or ASX200 over a 48 or 60-month period
Step 4: Apply the CAPM formula to compute the r (Discount rate)
r = risk free rate + beta (return of AOI - risk free rate)
Step 5: Estimate the growth rate
a) using historical growth rate of Earnings per share
b) using the self sustainable growth rate = Retention ratio x ROE
c) using the industry growth rate
d) using the competitor's growth rate
Step 6: Apply the Constant growth DDM, where
Price = Current dividend (1 + growth rate) / (discount rate - growth rate)
Step 7: compare this estimated price with the current stock price. If the estimated price is higher than the current stock price, the stock is considered 'undervalue', you should make a 'buy' recommendation.
Note b: to apply a two-stage growth Dividend Discount Model?
The key points here are:
You have to estimate how long the high growth period will last.
Hint: You may simply assume 3 years or 4 years
You have to estimate a constant growth rate after the high growth period.
Hint: You may use the same constant growth rate mentioned earlier