Write a 1-2 page (approximately 500 words) paper on the following: COMPANY IS JO

Question

Write a 1-2 page (approximately 500 words) paper on the following: COMPANY IS JOHNSON & JOHNSON
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 be necessary in your valuation to best approximate the market valuation?

Part B -
Relative Valuation: Estimate a growth rate for your firm's Earnings per Share (EPS).
Determine an applicable Price-Earnings (P/E) ratio for your firm in 5 years.
Calculate an estimated value of a share of the stock in 5 years using the P/E ratio model (Eq. 8-10 in the textbook).
Respond to this question: Would you characterize your stock as undervalued or overvalued? Explain.
Respond to this question: Based on your valuations in parts A and B, would you invest in this stock? Explain.

Explanation / Answer

Part A

Dividend for 2015

$2.95

Dividend for 2014

$2.76

Estimated growth rate

6.88%

Discount rate = 12.50%

D0 = $2.95

D1 = $2.95 * 1.0688 = $3.15

P0 = $3.15/ (0.1250 – 0.0688) = $3.15/0.0562 = $56.05

Current market value per share = $119.33 (https://finance.yahoo.com/q?s=JNJ)

It is possible that the actual market value of a share may differ from its calculated value as different variables may be perceived differently by each investor. It is also important to understand that each investor has different perceptions about the risks and rewards and therefore there can be some differences in the two sets of prices. In order to best approximate the valuation with the market valuation, it is important to adjust the discount rate. The discount rate given in this case study is 12.5% which seems to be higher given the overall risk profile and fundamentals of the company. It is therefore important that the discount rate is adjusted in order to approximate two values with each other. Lower required rate of return therefore outlines that the investors have more confidence in the fundamentals of the firsts therefore they will be requiting lower rate of returns because the overall level of risk will be low.

Dividend for 2015

$2.95

Dividend for 2014

$2.76

Estimated growth rate

6.88%

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