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Company Valuation Methods

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Company Valuation:

Go to http://finance.yahoo.com/q?s=GE and, under Financials, download the income statement, balance sheet, and cash flow statement. GE is one of the holdings in the trust fund. Develop a valuation analysis for the intrinsic value of GE stock. The analysis should incorporate CAPM and the single-stage DDM. Refer to "Key Statistics" in the Yahoo site for additional model variable values such as beta.
Also, using FCFF (single-stage), calculate the intrinsic value of the firm.

Be sure to show all the detail of your calculations and of your computations of the inputs (e.g., g, k, WACC) and to document your research sources for inputs required for your valuation formulas (e.g., Equity Risk Premium). State and justify your conclusion as to whether GE is undervalued, overvalued, or fairly valued and why you believe that to be the case for each of the three methods. Also, state a conclusion as to which of the three methods might appear most reasonable to rely upon.

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Solution Preview

Let's evaluate the value of General Electric's stock based on the CAPM, single-stage DDM and FCFF (single-stage). Each of these methods will be used to determine the intrinsic value of stock.

The CAPM model will be examined first. The formula for CAPM is R(rs) = rf + Bs[E(rm) - rf]. The Market Risk Premium is equal to the E(rm) - rf. The risk free return is equal to the rate of return of U.S. Treasury Bills. The expected return on the market is given as a percent. The value of a company is equal to the Covariance divided by the Variance. Beta measure the sensitivity of a stock's return as compared to the overall market return. Let's perform the valuation of General Electric (The information was obtained at http://www.mtholyoke.edu/~aahirsch/stockvaluation.html).

The market risk premium is equal to 5.41%, which was obtained at http://us.spindices.com/indices/strategy/sp-us-equity-risk-premium-index-tr.
The rate on 10 - year Treasury Bills is equal to 1.87%, which was obtained at http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield.

General Electric's stock beta is 1.47.
The current dividend rate is $0.47.
The five year expected dividend growth rate is 4.20%.
R(rs) = rf + Bs[E(rm) - rf] = R(rs) = .0187 + 1.47(.0541) = .0187 + .0795 = .098227 ...

Solution Summary

Company valuation methods are examined. Which three methods might appear most reasonable is determined.

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