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Investment Analysis
Equity Valuable Assignment

• This assignment should be completed in the same groups as the ETF assignment. Although this is a collaborative group assignment, each group member must fully participate and be responsible for the solution to the entire assignment. Each group should submit only one solution to the assignment.
• A hardcopy version of your assignment is due at the beginning of class on the due date. In your hardcopy submission, please be sure to provide clear answers to all questions and attach all relevant printouts from your excel worksheets and Bloomberg.

• All supporting excel worksheets must be placed in one excel file and emailed to me before class on the due date. “BFIN 4227 _Team Last Names_EVA” should be used as the excel file name and the email subject.
• No late assignment will be accepted.
• Part I: 25 Points; Part II: 40 points, Part III: 35 points; à Total: 100 Points. Early submissions will be rewarded with additional 5 extra points.

• This assignment accounts for 15% of the course grade.

Part I. Constant Growth Dividend Discount Model (25 points)

You expect Bright Path Corporation to have a ROE of 13%, a beta of 1.2, an expected earnings per share (E1) of $3.19, and a stable retention ratio (b) of 60%. The expected market return for future years is 11%, and long-term risk free assets (10-year Treasury notes) are yielding 2.8%.

a) Calculate your intrinsic value estimate of Bright Path stock (V0) according to the constant growth DDM.
b) Calculate the Present Value of Growth Opportunities (PVGO).
c) Calculate the justifiable forward P/E and trailing P/E according to the constant growth DDM.
d) If the expected ROE for Bright Path Corporation has been revised down to 11% from 13%, recalculate the V0, PVGO, and the justifiable forward P/E and trailing P/E. Discuss whether these changes in V0, PVGO, and the justifiable forward P/E and trailing P/E are consistent with the concepts that we learned from class.

Part II. Multiple-Stage FCFE Model (40 points)

Kevin Smith is preparing a valuation of Logistic Solutions, Inc. Kevin has decided to use a multiple-stage FCFE valuation model and the following estimates. The FCFE per share for the current year is $1.76. The FCFE is expected to grow at 16 percent for the next two years, then at 10 percent annually for the following five years, and finally at a constant growth rate of 6 percent starting year 8. Logistic Solutions’ estimated beta is 1.28, and Kevin believes that the current market conditions dictate a 2.8 percent risk free rate of return and a 7.0 percent market risk premium.

The following are five independent questions.

a) Given Kevin’s assumptions and approach, estimate the value of a share of Logistic Solutions.
b) If the terminal growth rate is projected to be 7%, rather than 6%, re-estimate the value of a share of Logistic Solutions. Does this new estimate make sense?

c) If the market risk premium is assumed to be 6%, rather than 7%, re-estimate the value of a share of Logistic Solutions. Does this new estimate make sense?
d) If the systematic risk (beta) of the stock increases substantially from 1.28 to 1.52, re-estimate the value of a share of Logistic Solutions. Does this new estimate make sense?

e) If Logistic Solutions’ estimated beta is statistically insignificant, suggest an alternative approach to arrive at the required rate of return (k) on the stock and use this new k to re-estimate the value of a share of Logistic Solutions. Assume Logistic Solutions’ bonds outstanding are traded at a yield of 5.7% and the risk premium required for Logistic Solutions’ equity shareholders over bond holders is 4.5%.

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Part III. Equity Valuation Analysis using Bloomberg (35 points)

Provide a relative valuation analysis for Apple Inc. (Ticker: AAPL).

a) Use the RV (relative valuation) function in Bloomberg equity analysis to compile a peer group of 6 to 12 stocks in the same industry.

b) Compile a relative valuation table that includes the following statistics for AAPL and its peers:
 Five price multiples: P/E, P/B, P/S, P/CF, EV/EBIDTA
 Four Fundamental factors: Five-year EPS growth, Return on Equity (ROE), Beta, Net Profit Margin (PM)

 Other Information: Closing Price, Market Cap, Sales Revenue, EPS, Debt to Equity Ratio, Dividend Payout Ratio

c) Compare the P/E, P/B and P/S of AAPL against the average P/E, P/B and P/S of the peer group. Discuss whether this is justified by the fundamental factors.
d) State your recommendation (Buy, Sell, Hold) on AAPL based on the relative valuation analysis above.
e) Identify two major limitations of the above analysis. Suggest what and how additional information could help you make a better decision on this relative valuation case.

Think about Discounted Cash Flow (DCF) analysis on AAPL.

f) Which DCF model (DDM, FCFE or FCFF) would you use? Justify your choice using historical data on the dividend payout ratio and debt to equity ratio of AAPL over the last five-year period.
g) Assuming the DCF model choice from f), determine the discount rate that you will use to discount AAPL’s future cash flows. Using resources from Bloomberg, explain in details how you have arrived at this discount rate estimate.

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