Case Study-AW116

Case Study-AW116 Online Services


KBR, Inc. (formerly Kellogg Brown & Root) is an American engineering, procurement and construction company, formerly a subsidiary of Halliburton. The company also has large offices in Virginia, Birmingham, and Newark, Delaware, in the United States and Leatherhead in the UK. After Halliburton acquired Dresser Industries in 1998, Dresser’s engineering subsidiary, The M. W. Kellogg Co., was merged with Halliburton’s construction subsidiary, Brown & Root, to form Kellogg Brown & Root. KBR and its predecessors have received many contracts with the U.S. military including during World War II, the Vietnam War, and the Iraq War.




Fluor Corporation  is one of the world’s largest publicly traded engineering, procurement, construction (EPC), maintenance, and project management companies headquartered in Irving, TX. Fluor works with governments and Clients in diverse industries around the world to design, construct, and maintain complex and challenging capital projects.
Clients depend on the expertise of Fluor’s 40,000 employees operating globally to deliver capital projects safely, on schedule, within budget, and with the quality they expect. (


Other competitors include PARSON’S CORPORATION AND AMEC FOSTER WHEELER PLC, which are private companies.




  1. Provide information on the return estimated for the common stock for both companies (preferred stock too if either company uses it.) Provide summaries covering any important features of the stock that would be relevant to an investor.  (There may not be any.)  Determine the required rate of return for the company’s stock. Use the DCF/Gordon growth/Dividend model, the bond yield premium method, and the CAPM.(For CAPM use the T-bond rate.  You may use the average spread of 6% as well.  See Chapter 9 for an excellent discussion.)  You will need to gather information on expected dividend growth rates, etc. Sources can include any of the sites already mentioned and any other that you wish.  Long term estimates are important, and I would like you to find at least two.  MSN and Reuters provide this estimate. Yahoo also provides this.  Gather relevant information from this material (any appropriate source) that will be useful in calculating market returns.   Be sure to carefully develop your estimate of the growth rate. In addition to the single stage dividend model, also apply a two stage model.Compare results to the surrogate company.  The surrogate company is more important in the stock and total company comparisons than with bonds because common stock should be compared to similar other companies.   (2-4 pages; use appendices to summarize if you wish.)  This is the most challenging section and you should provide an overview of the data you collected and the reasoning for the final choices that you make concerning the cost of equity provided by this model.


Attached is excel sheet for the base data of KBR and FLR.



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To calculate what the expected (if we didn’t expect this return why would we invest in this stock) market returns should be we gathered data from several sources regarding growth including two we calculated on our own. The sources of data we used included growth estimates from Value Line, Yahoo, The Street, and Business Week.  We calculated two of our own by comparing the retention ratio of both companies against their return on equity ratio found in Reuters.


We experienced several challenges when comparing data various providers as well as our own.  Our primary challenge was the inconsistency in how these sources provided their expected growth rates.  Some included constant growth expectations which allowed for a “constant growth” single stage analysis however many of the sources provided rates that changed between years 1 & 5.  None of the sites forecasted beyond 5 and we treated year 5 as a Horizon value expecting growth to “level out.”
Before we would be able to leverage this data in any valuable calculations to compare the two companies we would need to also find out what the minimal acceptable return would be.  We would again use multiple methods to do this and use the average in our larger calculation.  The three methods used were the Gordon Method, or DCF, CAPM and Bond over Judgment.  The attached spreadsheet provides greater detail of our calculations but our averages are in the chart below.

  DCF CAPM Bond Over  
Exelon 9.1790% 6.44% 8.2713% 7.9618%
CHK 6.6080% 10.66% 9.0829% 8.7838%


With 6 sources of growth data including the two we calculated on our own we decided the best way to leverage this information was to calculate the dividend growth for five years using all sources of data including an average of them.  By calculating the dividend growth rates provided by all sources and comparing them to what our “expected/minimal” return would be we could determine what we should expect from our dividend yield as well as our capital gains.


Also in the accompanying spreadsheet we include data for all calculations however to simplify the amount of data in this paper we’ve only included the averages for expected dividends, capital gains yield, and the expected stock price.

Excelon Averages
Year 0 1 2 3 4 5
Dividend  $          2.10  $             2.26  $          2.44  $          2.63  $          2.84  $          3.06
Dividend Yield 4.8287% 5.0457% 5.0648% 5.3366% 5.6230% 5.9122%
Capital Gains Increase   2.9161% 2.8969% 2.6252% 2.3388% 2.0495%
Stock Price – Single Stage    $           10.18  $        10.29  $        10.93  $        11.61  $        12.55
Stock Price – Forecast Dual Stage   $44.76 $46.05 $47.26 $48.37 $49.36
Chesapeake Averages
Year 0 1 2 3 4 5
Dividend  $          0.35  $             0.36  $          0.37  $          0.39  $          0.42  $          0.45
Dividend Yield 1.3704% 1.4282% 1.4448% 1.5342% 1.6291% 1.7607%
Capital Gains Increase   7.3556% 7.3391% 7.2497% 7.1547% 7.0231%
Stock Price – Single Stage    $           57.38  $        57.59  $        60.69  $        63.94  $        67.23
Stock Price – Forecast Dual Stage   $27.42 $29.43 $31.56 $33.82 $36.20



We were able to notice two distinct characteristics of each of these companies, primarily in how they issue dividends and how important those dividends are to their shareholders compared to capital gains.  In reviewing the “ratio” analysis we recognized that Chesapeake displayed signs of a growing company.  Where their sales growth rate outpaced the industry and Exelon their management effectiveness and profitability were lagging.


In their stock price analysis we see a similar trend where their growth expectations seems very inconsistent from one source to the next and their primary method of driving shareholder value is through capital gains rather than dividends.   Exelon on the other hand has demonstrated consistent dividend performance over a period of time and their growth expectations are significantly more consistent from one source to the next


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