1. For purposes of this exercise, let’s take a closer look at the stock of Exxon Mobil Corporation (XOM). Use websites such as Yahoo! Finance, Google Finance, MSN Money (www.msn.com/en-us/money/markets), and Morning star to find the company’s current stock price and see its performance relative to the overall market in recent months. What is Exxon Mobil’s current stock price? How has the stock performed relative to the market over the past few months?
2. Check recent headlines on the website to see the company’s recent news stories. Have there been any recent events impacting the company’s stock price, or have things been relatively quiet?
3. To provide a starting point for gauging a company’s relative valuation, analysts often look at a company’s price-to-earnings (P/E) ratio. Go to the website’s summary quote or key statistics screen to see XOM’s forward P/E ratio, which uses XOM’s next 12-month estimate of earnings in the calculation, and to see its current P/E ratio. What are the firm’s forward and current P/E ratios?
4. To put XOM’s P/E ratio in perspective, it is useful to see how this ratio has varied over time. (If you go to Morning star and click on the valuation tab, you should see the 10-year summary of its P/E ratio. In addition, it shows a 10-year summary for the S&P 500 P/E ratio as well as Exxon Mobil’s 5-year average.) Is XOM’s current P/E ratio well above or well below its 5-year average? Explain why the current P/E
deviates from its historical trend. On the basis of this information, does XOM’s current P/E suggest that the stock is undervalued or overvalued? Explain.
5. To put the firm’s current P/E ratio in perspective, it is useful to compare this ratio with that of other companies in the same industry. To see how XOM’s P/E ratio stacks up to its peers, refer to Google Finance’s Related Companies screen. (If you click “Add or remove columns,” you will find that you can obtain comparisons of a number of key statistics for either the most recent year or quarter.) For the most part, is XOM’s P/E ratio above or below that of its peers? In Chapter 4, we discussed the various factors that may influence P/E ratios. Can any of these factors explain why XOM’s P/E ratio differs from its peers? Explain.
6. In the text, we discussed using the discounted dividend model to estimate a stock’s intrinsic value. To keep things as simple as possible, let’s assume at first that XOM’s dividend is expected to grow at a constant rate of 5% annually over time. So, g 5 5%. If so, the intrinsic value equals D1/(rs 2 g), where D1 is the expected annual dividend 1 year from now, rs is the stock’s required rate of return, and g is the dividend’s constant growth rate. Go back to the summary (overview) screen and find XOM’s current dividend. Multiply this dividend by 1 1 g to arrive at an estimate of D1.7. The required return on equity, rs, is the final input needed to estimate intrinsic value. For our purposes, you can assume a number (say, 9% or 10%) or you can use the CAPM to calculate an estimate of the cost of equity, using the data available on the Internet. (For more details, look at the Taking a Closer Look exercise for Chapter 8.) Having decided on your best estimates for D1, rs, and g, you can calculate XOM’s intrinsic value. Be careful to make sure that the long-run growth rate is less than the required rate of return. How does this estimate compare with the current stock price? Does your preliminary analysis suggest that XOM is undervalued or overvalued? Explain.
8. It is often useful to perform a sensitivity analysis, where you show how your estimate of intrinsic value varies according to different  estimates of D1, rs, and g. To do so, recalculate your intrinsic value estimate for a range of different estimates for each of these key inputs. One convenient way to do this is to set up a simple data table in Excel. On the basis of this analysis, what inputs justify the current stock price?
9. Until now, we have assumed that XOM’s dividend will grow at a long-run constant rate of 5%. To gauge whether this is a reasonable assumption, it’s helpful to look at XOM’s dividend history. If you go to the MSN Money website (www.msn.com/en-us/money/markets) and go to the annual income statement  financials screen, you should see the firm’s annual dividend over the past 4 years. On the basis of this information, what has been the average annual dividend growth rate? On the basis of the dividend history and your assessment of XOM’s future dividend payout policies, do you think it is reasonable to assume that the constant growth model is a good proxy for intrinsic value? If not, how would you use the available data on the Internet to estimate intrinsic value using the non constant growth model?
10. Finally, you can also use the information on the Internet to value the entire corporation. This approach requires that you estimate XOM’s annual free cash flows. Once you estimate the value of the firm’s operations and the value of any non-operating assets, you subtract the value of debt and preferred stock to arrive at an estimate of the company’s equity value. By dividing this value by the number of shares of common stock outstanding, you calculate an alternative estimate of the stock’s intrinsic value. Although this approach may take additional time and involves more judgment concerning forecasts of future free cash flows, you can use the financial statements and growth forecasts on the Internet as useful starting points. If you go to the annual cash flow statement financials screen, you will find historical annual free cash flow values. These numbers are useful as a starting point to arrive at an estimate for the next year. Note  that you can also obtain historical free cash flows over a 5-year period from Morning star. After entering the company’s ticker symbol, simply select the Financials tab, select Cash flow, and make sure the annual dialog box is selected. (To find any definitions on Morning star, scroll down to the bottom of the page, and select Glossary. On the next screen you will see an alphabetic index; just click the first letter of the term for the definition you’re interested in.)