Purchase Solution

Company Valuation Methods

Not what you're looking for?

Ask Custom Question

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.

Purchase this Solution

Solution Summary

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

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 ...

Purchase this Solution


Free BrainMass Quizzes
Paradigms and Frameworks of Management Research

This quiz evaluates your understanding of the paradigm-based and epistimological frameworks of research. It is intended for advanced students.

Employee Orientation

Test your knowledge of employee orientation with this fun and informative quiz. This quiz is meant for beginner and advanced students as well as professionals already working in the HR field.

Change and Resistance within Organizations

This quiz intended to help students understand change and resistance in organizations

Situational Leadership

This quiz will help you better understand Situational Leadership and its theories.

Business Processes

This quiz is intended to help business students better understand business processes, including those related to manufacturing and marketing. The questions focus on terms used to describe business processes and marketing activities.