What is the estimated intrinsic stock price based on the discounted cash flow (
ID: 2791229 • Letter: W
Question
What is the estimated intrinsic stock price based on the discounted cash flow ( DCF)model of valuation, and the below information? ARMK had revenues and earnings in 2014 of $14.83Billion, & $148.96Million consecutively. They saw revenues and earnings in 2015 of $14.33Billion & $235.95Million consecutively, and in 2016 $14.42Billion and $287.81Million. The annual dividend growth in 2016 was 9.7%. The stock info is below. You may assume where there is missing information.
Aramark (ARMK)
NYSE - NYSE Delayed Price. Currency in USD
41.32+0.35 (+0.87%)
At close: November 24 1:02PM EST
Summary
Previous Close
40.97
Open
41.13
Bid
0.00 x 0
Ask
0.00 x 0
Day's Range
41.08 - 41.36
52 Week Range
32.87 - 44.12
Volume
279,785
Avg. Volume
1,195,221
Market Cap
10.128B
Beta
0.43
PE Ratio (TTM)
29.94
EPS (TTM)
1.38
Earnings Date
Feb 5, 2018 - Feb 9, 2018
Forward Dividend & Yield
0.42 (1.03%)
Income Statement
All numbers in thousands
44.60
Previous Close
40.97
Open
41.13
Bid
0.00 x 0
Ask
0.00 x 0
Day's Range
41.08 - 41.36
52 Week Range
32.87 - 44.12
Volume
279,785
Avg. Volume
1,195,221
Explanation / Answer
We shall average some of the methods of share value.
Method 1: (D/P + g) method
Dividend yield = 1.03%, Market Price of shares = $ 41.13
Since Dividend yield= (Dividend per share )x100/ Market Price , we get the equation,
1.03 = DPSx100/41.13
So, DPS = 41.13x1.03/100
Therefore DPS = .4236
Market Price = $41.13
Growth rate in Dividend (g)= 9.7
So, intrinsic value = (D/P + g )=
(.4236/41.13)x100 + 9.7
=$10.73
Method 2: Maintainable Profit approach
Step 1:We first find out the rate of return in this company
As the rate of return is not given, we take the inverse of the P/E ratio to be the rate of return:
P/ E ratio = 29.94
So, rate of return = (1/29.94)x100 = 3.34%
Step 2: We see the trend of last 3 years’ maintainable profits.
Maintainable profits= (2014,2015,2016) =148956, 235946, 287806
Sales = = 14.83 billion,14.33 billion,14.42 billion
Profit to sales % (2014,2015,2016) = 1.00%, 1.46%, 1.995%
So Net Profit % increases by about 0.5% every year- trend( though sales have been stagnant)
Projected maintainable Profit=2% approx of projected sales 14.35billion=287,000
Step 3: Capitalise maintainable Profit on rate of return.
Total Share value = maintainable Profit/ Rate of return .As Rate of return=3.34%,
= 287000/3.34% =$8592814
Step 4: Divide share value by no of shares
Assume 1 share of 10$ , since the market capitalisation = $10.128billion, number of shares=1012800 shares
Intrinsic Share value= 8592814/1012800= $8.48
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