Question

You are researching the valuation of the stock of a company in the food-processing indus­try. Suppose...

You are researching the valuation of the stock of a company in the food-processing indus­try. Suppose you intend to use the mean value of the forward P/Es for the food-process­ing industry stocks as the benchmark value of the multiple. This mean P/E is 18.0. The forward or expected EPS for the next year for the stock you are studying is $2.00. You calculate 18.0 × $2.00 = $36, which you take to be the intrinsic value of the stock based only on the information given here. Comparing $36 with the stock’s current market price of $30, you conclude the stock is undervalued.

A.) Give two reasons why your conclusion that the stock is undervalued may be in error.

B.) What additional information about the stock and the peer group would support your original conclusion

Homework Answers

Answer #1

A) Firstly, It depends on the interest rates.

$36 is the forward value of the stock. The current value is $30.

Now lets say the interest rate is 15%. the intrinsic value would be $36/1.15 = $31.30

This would imply that the current market price is over valued.

Secondly, Forward price of $36 is dependent on the expectation that EPS next year would be $2. What if the EPS is $1. If that is true the current market price is over-valued.

B) If the SD of forward P/E in the peer group is very small then it would support my conclusion as i can take forward P/E for this stock as industry mean as well.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
home / study / business / finance / finance questions and answers / you are researching...
home / study / business / finance / finance questions and answers / you are researching the valuation of the stock of a company in the food-processing indus- try. ... Your question has been answered Let us know if you got a helpful answer. Rate this answer Question: You are researching the valuation of the stock of a company in the food-processing indus- try. su... you are researching the valuation of the stock of a company in the food-processing indus-...
After researching the competitors of Levi Strauss & Co (Levi’s), which is a private company, you...
After researching the competitors of Levi Strauss & Co (Levi’s), which is a private company, you determine that most comparable firms have the following valuation ratios (see the table below). Further research reveals that Levi Strauss’s EBITDA is $ 576.1 million and its Earnings per Share (EPS) is $1.5. The company has $25 million in cash, $1,441 million in debt (market value), and 84 million shares outstanding. Urban Outfitters GAP Guess American Eagle EV/EBITDA 5.1 4.1 5.8 4.8 P/E 9...
Write a 1-2 page (approximately 500 words) paper on : DISNEY COMPANY Part A-Fundamental Valuation: Estimate...
Write a 1-2 page (approximately 500 words) paper on : DISNEY COMPANY Part A-Fundamental Valuation: Estimate a growth rate for your firm's Dividends per Share. Assume a 12.5% discount rate. Calculate an estimated value of a share of the stock using the constant-growth model (Eq. 8-6 in the textbook), also known as the Gordon growth model. Compare and contrast your valuation results with the current share price in the market. Respond to this question: What changes in the variables would...
use the following information to answer the questions. The made up company name is ABC. Price:...
use the following information to answer the questions. The made up company name is ABC. Price: $20 R: 12% G: 4% D0: 1.10 P/E: 16 EPS: 1.25 Analyst E growth: 7% Now answer the following below using the above information that’s provided: ·      Part A-Fundamental Valuation: 1.    Estimate a growth rate for your firm's Dividends per Share. 2.    Assume a 12.5% discount rate. 3.    Calculate an estimated value of a share of the stock using the constant-growth model (Eq. 8-6...
Suppose today you are considering whether to buy Stock Theta, and you want to do some...
Suppose today you are considering whether to buy Stock Theta, and you want to do some basic analysis before buying the shares. By reading the firm’s most recent Balance Sheet, you find the following information: Net Income is $5,000,000, Total Shareholders’ Equity is $25,000,000, Total Assets is $40,000,000. From other publicly available sources, you further obtain the following information: the most recent earnings per share (EPS) is $3, the dividend payout ratio is 60%, and the firm’s beta is 1.4....
Suppose today you are considering whether to buy Stock Theta, and you want to do some...
Suppose today you are considering whether to buy Stock Theta, and you want to do some basic analysis before buying the shares. By reading the firm’s most recent Balance Sheet, you find the following information: Net Income is $5,000,000, Total Shareholders’ Equity is $25,000,000, Total Assets is $40,000,000. From other publicly available sources, you further obtain the following information: the most recent earnings per share (EPS) is $3, the dividend payout ratio is 60%, and the firm’s beta is 1.4....
Exotic Food Inc., Capital Budgeting Case CASE SUMMARY Exotic Food Inc., a food processing company located...
Exotic Food Inc., Capital Budgeting Case CASE SUMMARY Exotic Food Inc., a food processing company located in Herndon, VA, is considering adding a new division to produce fresh ginger juice. Following the ongoing TV buzz about significant health benefits derived from ginger consumption, the managers believe this drink will be a hit. However, the CEO questions the profitability of the venture given the high costs involved. To address his concerns, you have been asked to evaluate the project using three...
1. Assume that you are an equity analyst and you have been asked to generate a...
1. Assume that you are an equity analyst and you have been asked to generate a twelve month forward price target for ShopSmart Plc, a retail company. You decide to use the discounted Free Cash Flow to Firm (FCFF) valuation model. For the year just ended you have collected the following information on ShopSmart PLC: ? Net Income: £260 m ? Sales: £2,600 m ? Depreciation: £100 m ? Investment in fixed capital: £180 m ? Interest expense: £110 m...
A random sample of companies in electric utilities (I), financial services (II), and food processing (III)...
A random sample of companies in electric utilities (I), financial services (II), and food processing (III) gave the following information regarding annual profits per employee (units in thousands of dollars). I II III 49.7 55.8 38.9 43.3 25.3 37.7 32.9 41.7 10.7 27.4 29.2 32.6 38.3 39.6 15.2 36.8 42.5 20.1 Shall we reject or not reject the claim that there is no difference in population mean annual profits per employee in each of the three types of companies? Use...
A random sample of companies in electric utilities (I), financial services (II), and food processing (III)...
A random sample of companies in electric utilities (I), financial services (II), and food processing (III) gave the following information regarding annual profits per employee (units in thousands of dollars). I II III 49.3 55.7 38.7 43.3 25.0 37.3 32.6 41.5 10.9 27.1 29.4 32.9 38.5 39.9 15.5 36.5 42.2 20.4 Shall we reject or not reject the claim that there is no difference in population mean annual profits per employee in each of the three types of companies? Use...