The project requires you to estimate the intrinsic value of your stock using four approaches. 

1) The first method is based on dividends and uses the DDM assuming constant growth. This requires us to estimate k and g. Fork, we use the stock's beta and the SML model. To find g, we need to estimate the growth rate in EPS assuming that the growth in EPS and dividends are the same. This assumption is very reasonable over long periods of time. You can use two approaches to find the value of g used in the DDM model: First, calculate g by using the accounting relationship g= ROE times the retention rate. Calculate a value for g for each of the last 5 years by multiplying the ROE by the retention rate and then take an average of the 5 years. Second, using a regression approach, regress the ln (EPS) (y variable) versus a time variable using 5 to 10 years of annual data. The coefficient on the time variable is an estimate of the growth rate (g). Thus, the regression equation is given by Ln(EPS) = a + b (time) where the value of b = g or the growth rate in earnings/dividends and Ln is the natural log. Use the regression procedure found in Excel to estimate the equation. The time variable will take on values of 1 through 5 for 5 years of data and 1 through 10 for 10 years of data. Using more data observations will give you better statistical results. Now, that you have estimates of k and g, you can use the DDM (using dividends) assuming constant growth. 

2) The second approach is based on the value of FCFE. You can estimate FCFE using the spreadsheet model that I put up in Blackboard. You should compute the FCFE for the firm for 5 to 10 years. Using the FCFE data, you then need to estimate the growth rate (g) for FCFE. To accomplish this, you need to use the regression approach where you regress Ln(FCFE) versus time using 5 to 10 years of annual data. The coefficient on the time variable is an estimate of the growth rate in FCFE. Now use the constant growth model replacing dividends with FCFE and using the growth rate in FCFE rather than the growth rate for EPS. Use the same k as in the dividend approach. 

3) The third approach is based on the value of operating cash flows. Get operating cash flows from the Statement of Cash Flow going back 5 to 10 years and use a regression model to estimate the growth rate (g) in operating cashflows. Now, use the constant growth model replacing dividends with operating cash flows and using the growth rate in operating cash flows rather than the growth rate in EPS. Again, use the same k as in the dividend approach. 

4) The final approach is to use the multiplier approach using multiples of earnings and at least two other measures of relative value. This approach is pretty well covered in Chapter 8 of the text.

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The project requires you to estimate the intrinsic value of your stock using four approaches ANSWER 1 Based on the dividend discount model and using the stocks beta and the SML model the intrinsic val... View the full answer