Rafael Lopez

February 26, 2020

FINA 4011-101
Project 1

Stock A: Dividend Discount Model

The stock that I chose to evaluate using the dividend discount model was Apple (APPL). Using
the financial information from Yahoo Finance, I was able to derive my reasoning towards my
position of this stock.

i. D0= $3.08. Apple’s current yearly paid dividend was $3.08.

Past Dividend History and growth rate average past 6 years history: g=10.34%

Year Annual Growth Rate

Dividend
2019 $3.04 7.80%
2018 $2.82 14.63%
2017 $2.46 10.31%
2016 $2.23 9.85%
2015 $2.03 9.97%
2014 $1.85 9.49%
Average 10.34%
ii. The forecasted future dividend growth rate based on the past 6 years is 10.34%
 iii. Forecast of future dividend growth rate based on g=ROE*b. g=71.00%
ROE= 55.47%
B= 1.28
g=ROE∗b=55.47 %∗1.28=71.00 %

iv. The growth rate that I chose was the average growth rate from the past six years of
dividends because this value appeared to be more reasonable than the growth
rate computed from the ROE*Beta value. The growth rate of 10.34% appears to
be in line with the yearly average growth of dividends per year from the Apple
stock.

v. Market Capitalization Rate

k =R F + β ( Rm −R F )

k =.0155+1.28 ( .10−.0155 )
k =.12366=12.37 %

vi. Valuation of Apple based on the components:

D 0 (1+ g) $ 3.08(1+.1034)
V 0= = =$ 167.41
k −g 0.1237−.1034
After completing the analysis, I would value Apple at $167.41. As of February 26, 2020, Apple
is currently trading at $291.67, a value that is much higher than the result calculated from the
dividend discount model. Since my calculation was lower than the current stock price, my
decision would be to short the Apple stock. By shorting the stock, I will borrow the stock I
plan to bet against, in this case being Apple, then immediately sell the shares I have
borrowed. Then I would wait for the stock to fall and buy the shares back at the new lower
price and pocket the difference after returning the shares to the broker.
Stock B: P/E ratio
For this evaluation, I will be using Microsoft (MSFT) to evaluate my position on the stock.
According to the image below from Microsoft Investor Reports:

i. Annual EPS of the firm: $5.06

ii. Current P/E ratio: According to YCharts, Microsoft current P/E ratio is 29.39. Yahoo
Finance has a trailing P/E ratio of 29.28.

iii. Average P/E ratio of peer companies in the same industry

Peer 2019 2018 2017 2016 2015 Average

MICROSOF 27.47 23.47 57.34 28.06 36.93 34.65
T
ORACLE 17.82 47.62 20.56 18.66 17.65 24.46
IBM 16.89 11.81 23.74 12.18 8.97 14.72
CISCO 18.93 126.07 17.04 13.58 13.93 37.91
Average 27.94
*PE values are from fourth quarter of the fiscal year from Macrotrends Website

Inventor Quick Current Return Return

Company Price/ Sales y Ratio Ratio on on
Turnover Equity Assets
MICROSOFT 8.9 14.0 2.6 2.8 43.83% 17.13%
ORACLE 4.6 - 2.2 2.4 48.12% 11.93%
IBM 1.5 20.8 0.9 1.0 50.12% 7.91%
 CISCO 4.0 12.5 1.6 1.8 28.97% 12.60%
*Values computed based on fourth quarter of financial reports from Thompson One website

iv. The firm has a higher PE ratio compared to its peers. The only peer that has a higher PE
ratio from a five-year average is CISCO. This is due to the fact that CISCO had a remarkable
fourth quarter PE ratio of 126.07. If we would exclude this value, Microsoft would have had a
higher PE ratio, making it better than its peers. Thompson One generated the qualitative
financial ratios to examine the performance of Microsoft against its peers. Microsoft has an
advantage when it comes to Price/Sales, Quick Ratio, Current Ratio, and Return on Assets.
While out of the investigation, IBM had the higher return on equity and CISCO had the better
inventory turnover ratio. Hence, Microsoft is the better company when it comes to a
comparison to its peers from a qualitative judgement performance.
v. What is your valuation of the company?
According to the website GuruFocus, the Target PE Ratio for software companies is 37.16.
I will be using this value as the Target PE value for my valuation.

Value=Target PE∗EPS
Value=37.16∗5.06=$ 188.03
As of February 26, 2020, Microsoft is currently trading at $170.71. I would procced to buying
the stock as the stock is undervalued compared to the P/E ratio calculation.
Stock C: Discounted Cash Flow Model
For my third stock, I will be using The Proctor and Gamble Company (PG) to value the
company using the Discounted Cash Flow Model. Values from Balance Sheet and Income
Statement are in millions.
Balance Sheet
Income Statement

PG’s FCFE:
FCFE=FCFF−FCFD
FCFF :OCF=EBIT + Depreciation−Taxes
FCFF :OCF=$ 4640+$ 677−$ 789=$ 4528
FCFF : NCS=Ending Net ¿ Assets−( Beginning net ¿−Depreciation )
Ending ¿ Asset=PP∧E+Other Assets=$ 22,153+ $ 70,653=$ 92,806
Beginning¿ Assets=$ 20,822+ $ 78,434=$ 99,256
Depreciation= $677
FCFF : NCS=$ 92,806−( $ 99,256−$ 677 )=−$ 5,773
FCFF : ∆ NWC=Ending NWC−Beginning NWC
NWC=Current Assets−Current Liabilities
Ending NWC=$ 18,917−$ 30,164=−$ 11,247
Beginning NWC=$ 24,431−$ 31,247=−$ 6786
FCFF : ∆ NWC=−$ 11,247−(−$ 6,786 )=−$ 4,461
FCFF=OCF−NCS−∆ NWC=$ 4,528−(−$ 5,773 )− (−$ 4,461 )=$ 14,672

FCFD=Interest Expense−( end . long term debt −beg .long term debt )
FCFD=$ 100−( $ 18,985−$ 21,514 )=$ 2,629

FCFE=FCFF−FCFD=$ 14,672−$ 2,629=$ 12,043

- Market capitalization Rate

k =R F + β ( Rm −R F )

k =.0155+0.36 ( .10−.0155 )
k =.04592=4.59 %
FCFE $ 12,043
Value of Equity= = =$ 262,260.45
k .04592
Upon completion of the calculations, using the discounted cash flow model, I value Proctor
and Gamble to have a Free Cash Flow to Equity holders of $262,260MM assuming the same
level of FCFE indefinitely. Since it has an acceptable value of equity, I would recommend
buying Proctor and Gamble as there is considerable profit in the stock valuation.
 References

https://www.macrotrends.net/stocks/charts/IBM/ibm/pe-ratio
https://www.macrotrends.net/stocks/charts/ORCL/oracle/pe-ratio
https://www.macrotrends.net/stocks/charts/CSCO/cisco/pe-ratio
https://ycharts.com/companies/MSFT/pe_ratio
https://www.thomsonone.com/Workspace/Main.aspx?View=Action
%3dOpen&BrandName=www.thomsonone.com&IsSsoLogin=True

https://www.gurufocus.com/industry_overview.php?sector=Technology&region=USA