One page recommendation letter and one page with all the work step for each problems
Valuation Project TwoYour name: Fill all the shaded cells below.Classmate's name: (if received or provided help on any question) Current stock priceDate: Shares outstanding Long-term growth rate (g)3.00% Cost of equity (RE)6.50% Weighted average cost of capital (RWACC)5.00% 1.Relative Valuation (a.) P/E Multiple Trailing P/E - Mastercard Trailing EPS - Visa Estimated share price (b.) EV/EBITDA Multiple EV/EBITDA - Mastercard EBITDA - Visa Estimated enterprise value Debt value* Cash Estimated equity value** Estimated share price *Use the book value of debt to proxy for the market value of debt. **Hint: Equity value is obtained from Enterprise value (EV) = Equity value + Debt Value - Cash. 2.Valuation using the Dividend Discount Model Trailing annual dividend amount (Div0) Estimated share price 3.Valuation using the Discounted Free CF Valuation Method Trailing free cash flow to equity (FCFE0) Estimated total value of equity Estimated share price 4.Recommendation Microsoft Word - HW - Firm valuation - Visa - 20SQ FINC 3420 – Intermediate Corporate Finance Prof. Katya Emm Page 1 of 3 Project Two Business Valuation – Visa, Inc. Our goals: We will practice valuing an actual firm using the concepts and techniques introduced in the course. Read: ‘Fundamentals of Corporate Finance,’ by Parrino, Bates, Gillan, and Kidwell, Chapter 18. Prepare: Working individually, answer the questions below. Fill the shaded blank cells in the accompanying Excel template spreadsheet. Perform all calculations in the spreadsheet itself by referring to the collected data in the same Excel file. Format all numbers in the same spreadsheet properly and consistently. In particular, be sure that all rates are reported in percentages with two decimal places, all dollar values have dollar signs and the same number of decimal places, if any, all values above one thousand have commas as thousands separators, it is indicated whether any numbers are displayed in either thousands or millions. Upload the Excel file with your work to Canvas. Important! Although this is an individual assignment, you are allowed to receive or provide help to a classmate. In order to avoid the appearance of academic dishonesty (specifically, copying or sharing the work), provide the name of that classmate in your submitted spreadsheet. FINC 3420 – Intermediate Corporate Finance Prof. Katya Emm Page 2 of 3 You work in a large investment firm and your current assignment is to perform stock valuation of Visa, Inc. (NYSE: V). Your boss recommends valuing the stock using the multiples analysis (relative valuation), dividend discount model and discounted free cash flow valuation method. You determine that the company’s cost of equity is 6.5% and its weighted average cost of capital (WACC) is 5%. You also estimate that the company’s dividends and free cash flows currently grow at 3% and forecast that they will continue to grow at 3% indefinitely. To gather any additional information, go to Yahoo! Finance (finance.yahoo.com). Enter the symbol for Visa (V). From the main page for Visa, click “Statistics.” Note the following terms used on the website: ‘Trailing Annual Dividend Rate’ is trailing annual dividend amount ($), ‘EPS (TTM)’ is trailing twelve months EPS, ‘levered free cash flows (TTM)’ is trailing twelve months Free Cash Flow to Equity (FCFE). 1. Relative Valuation (30 points) Estimate Visa’s share price using (a) trailing P/E and (b) Enterprise Value (EV)/EBITDA multiples of Mastercard, Inc. (NYSE: MA), which is one of Visa’s main competitors. Obtain Mastercard’s trailing P/E and EV/EBITDA ratios from Yahoo! Finance (finance.yahoo.com). 2. Dividend Discount Model (30 points) Estimate Visa’s share price based on the dividend discount model. 3. Discounted Free Cash Flow Valuation Method (30 points) Estimate Visa’s share price based on the discounted free cash flow valuation method using free cash flows to equity (FCFE). 4. Recommendation (10 points) What recommendation would you make as to whether your clients should buy or sell Visa’s stock based on your price estimates? Hint: Don't be surprised if you get a wide range of estimated share prices obtained using different valuation methods. In question 4, explain which method(s) you believe provides the best estimate and make your buy/sell recommendation accordingly. Below are a few sample answers by previous students to this question: FINC 3420 – Intermediate Corporate Finance Prof. Katya Emm Page 3 of 3 "After using multiple business valuation techniques, I have come up with a wide range of estimated share prices for Nordstrom's. Nordstrom's expected cash flows must be quite high for the share price to more than double the rest of the estimations… I would suggest this estimation is an outlier and focus on the other three. The other three estimations are all below the actual current share price. This would lead me to suggest that the current share price of Nordstrom is too high and you should sell their stock.” (Nordstrom, Inc. was the subject company) "According to the estimated share prices calculated for the relative valuation, the stock is undervalued. The reason for using the two relative valuation estimations is because they have been calculated using numbers that are affected by the market. Using this recommendation, I would suggest that one should either buy the stocks at the current price or hold onto the stocks if they currently own any..." (Apple, Inc. was the subject company) "To calculate whether Apple stock should be bought or sold, I used not only one of the valuation methods but I combined all three. I used 50% weighting for relative valuation because it allows us to truly compare the stock to what is already trading on the stock market. I also used 20% weighting for the DDM because DDM is usually lower than the actual stock price and 30% Discounted Cash Flow method, which tells us what is the present value of the future cash flows. This gave us a stock price of $218.52 which is a 14.96% upside from the current price. Therefore, I recommend purchasing Apple stock." (Apple, Inc. was the subject company)