. Choose a mature or value stock (in contrast to growth stock, must have a low g

Question

. Choose a mature or value stock (in contrast to growth stock, must have a low growth in EPS, low beta, low market/book ratio, low P/E, low Peg) that has not been chosen by other students. Estimate its range of values, please look at my lecture note for valuation of mature stocks..
here is an example :
Constant Growth Model:
PO= D1/Ks-g
Growth rate (g) 8% (MSN Money) for the next 5 years
Estimation of Ks:
• Required Rate of Return for KFT using CAPM:
KKFT = KF + (KM – KF)* bKFT
10 year government bond yield: 2.13
Beta of KFT: .56 (Yahoo Finance)
(KM - KF): 6.5%
KKFT = 2.13 + (6.5 %) *.56 = 5.77%
• Dividend Growth
KKFT= D1/P0 + g
D1= 1.16* (1+.07) = 1.24
P0= 35.23
KKFT = 1.24/35.23 + .08= 11.15%

• Bond Yield
Morningstar Credit Rating: BBB-
The average spread for a BBB- is 1.79%.
Bond Yield: 2.13% + 1.59%= 3.92%
Average bond yield for mature stocks: 4%
KKFT = 3.92 % + 4 % = 7.92 %

• Required Return
CAPM method = 5.77 % 20% Weight
D1/P0 + g method = 11.15% 60% Weight
Bond yield + Risk premium = 7.92 % 20% Weight
Final Estimation of KKFT:
KKFT = .20 * 5.77 % + .60 * 11.15 % + .20 * 7.92 % = 9.42 %

• Intrinsic Value
P = D1 / k – g
P = 1.24 / (.0942 - .08)
P = $87.32
Estimated the intrinsic value of Kraft Foods Inc. to be $87.32

Explanation / Answer

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