To determine the stock value using the discounted cash flow method: Forecast the free cash flows. Start
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Question:
- To determine the stock value using the discounted cash flow method:
- Forecast the free cash flows. Start by using the historical data from the financial statements downloaded from Morningstar to compute the three-year average of the following ratios:
- EBIT/Sales
- Tax Rate (income tax expense/income before sales)
- Property, plant & equipment/Sales
- Depreciation/property, plant & equipment
- Networking capital/sales
- Create an empty timeline for the next five years
- Forecast future sales based on the most recent year’s total revenue growing at the LT growth rate (5Y average) from Reuters for the first five years of the forecast.
- Use the average ratios from step 5. a. above to forecast EBIT, property plant & equipment, depreciation, and net working capital for the next five years.
- Forecast the free cash flow for the next five years.
- Determine the horizon enterprise value for year 5 using a long-term growth rate of 4% and a cost of capital of 11% for JNJ.
- Determine the enterprise value of the firm as the present value of the free cash flows.
- Determine the stock price. Note: your enterprise value is in thousands of dollars and the number of shares outstanding Is in billions.
- Forecast the free cash flows. Start by using the historical data from the financial statements downloaded from Morningstar to compute the three-year average of the following ratios:
- To calculate an estimate of the JNJ price based on a comparable P/E Ratio, multiply the industry average P/E ratio by JNJ EPS.
- Compare the stock values from both methods to the actual stock price.
Related Book For
Cornerstones of Financial and Managerial Accounting
ISBN: 978-1111879044
2nd edition
Authors: Rich, Jeff Jones, Dan Heitger, Maryanne Mowen, Don Hansen
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