I am working on a project and trying to determine the intrinsic value of UPS Stock. After reviewing info, I came up with the following calculation for the intrinsic value of UPS stock; however, the actual stock price today is 70.25. I am not sure why my calculation does not come close to this figure. Also, is there another method I should use? Please advise if this looks correct. Thanks
The S&P dividend growth rate is 13.63. The S&P 500 ROE = 21.20
Dividends paid to date for 2008 = .87 (This is close to the amount of total dividends paid in 2007).
V0 = Instrinsic value of your stock
G = growth rate of dividends
D0 = current dividends per share
K = CAPM required rate of return
VO = D0 (1+g)/(k-g)
VO = 1.87(1+13.63%)/21.20%
VO = 1.87(1.1363)/(7.57%)
VO = 2.116148/7.57%
VO = $27.95
There are different certain valuation techniques:
Free cash flow or WACC approach gives the firm's value of assets or stock.
The use of the DCF techniques can be extended to value a business firm. In the valuation of a firm a financial analyst usually assumes a constant debt ratio. The firm can be valued using Free Cash Flows and WACC. (Weighted average cost of capital)
Free cash flows are the funds that can be distributed to investors after the operating costs have been deducted. Operating costs are the costs incurred while running the business and making a product or providing a service. These costs include but are not limited to: materials, labor, rent, taxes, interest, loan payments, etc. The remaining cash or Net Operating Profit after Taxes, can be used to reinvest in the company, distribute to investors, or reduce debt.
As stated previously, Free Cash Flow is the remaining profit that can be used to distribute to share holders or pay off debt. Depending on the position and goals of the business it can choose to do either or both of these activities. The difference between NOPAT and the Invested Capital is the Free Cash Flow.
Further, the analyst assumes a horizon period for analysis and calculates the horizon value at the end of the horizon period. Horizon value depends on the growth prospects of the firm after the horizon period. Thus, the value of the firm is given as follows:
The value of equity is obtained by subtracting the outstanding amount of debt from the value of the firm. The value of equity divided by the number of outstanding shares gives the equity value per share.
Value of stock = Value of firm - Value of Debt
In this we can have constant Growth Valuation Model
The constant growth valuation model assumes that the company will grow at a constant rate. Using the growth rate, Weighted Average Cost of Capital, and Free Cash Flows we can find the present value of a company that is presumed to grow indefinitely. This model is useful because it is difficult to project the financial statements for a company far into the future. This model only requires data from one ...
This discusses the methods of computation of Intrinsic value of your stock.