You\'re a financial advisor and one of your clients comes to you for advice. He

Question

You're a financial advisor and one of your clients comes to you for advice. He wants to invest in company XYZ. What would be your first steps in order to help your client?

After taking those required steps you investigate the financial data, you find out that the current stock pirce is at $47.50. The company has grown at an average of 12.2% for the past 10 years. The current rate of inflation is 3% and the current 30-year bond yield is 2%. The most recent information from the 2015 Statement of Cash Flows, indicates a -$4.1 Billion in capital expenditures, $7 Billion in cash from operation activities and $700 Million from investing activities, $500 Million dividends paid and there are 1 Billion shares outstanding. Using the DCF valuation method, what would you recommend to your client and why?

Explanation / Answer

Solution:

The first step would be the analysis of the company's performance and looking into the past history of the company stock and operational activities of the company . The financial advisor needs to also check whther the company is performing as per the industry standards or not.

Some of the fundamental analysis would be checking som eof the ratios like current ratio , profit margin ,debt equity ratio , interest coverage ratio , dividend payout ratio etc which helps the financial advisors to advice the client regarding the invesment.

Growth rate = 12.2% - 3% = 9.2%

DCF valuation = discounted cash flow valuation helps to value a company based on the future cash flows

operational activity the cash flow = 7 billion

no of shares = 1 billion shares

current stock price = 47.50

First we would find out the rate of return ie discounted rate using the gordans model also known as dividend discount model

= dividend paid = $.5 per share

.5/ 47.50 + .0922 = 10.28% we need to discount

Hence the value of the company would be Free cashflow / .1028 - .0922

= 7 billion - 4.1 - .7 -.5=$ 1.7 billion

= 1.7/.0105 = 161.90

Hence the intrinsic value = 161.90 /1 = $161

Since the intrinsic value is more than the current stock price hence I would recommend to invest in the company .

Thank you.

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.