VOLKSWAGEN 01/20/2024

BCF FINAL
ASSIGNMENT
Dev Sagar - 230101297

VOLKSWAGEN
APO GROUP 1 – SEC E
 1) Estimating Volkswagen Motors' Value using the Dividend Discount
Model (DDM) for 2025

Assumptions:

 Current share price (as of January 19th, 2024): €107.68

 Dividend per share (TTM): €4.23
 Risk-free rate: 2.5% (Germany's 10-year government bond yield)
 Terminal growth rate: 2.0% (Average long-term GDP growth of developed
economies)
 Growth stage assumptions:
o Stage 1: High growth (2023-2025): 7.8% (based on analyst forecasts)
o Stage 2: Stable growth (2026 onwards): 2.0%

Calculations:

1. Projected Dividends:

o Year 2024: €4.23 * (1 + 7.8%) = €4.55

o Year 2025: €4.55 * (1 + 7.8%) = €4.91
o Terminal Value (Year 2026 onwards): €4.91 * (1 + 2.0%) / (2.5% - 2.0%) =
€245.50
2. Present Value of Dividends:

o Year 2024: €4.55 / (1 + 2.5%) = €4.42

o Year 2025: €4.91 / (1 + 2.5% * 2) = €4.27
o Terminal Value (present value): €245.50 / (1 + 2.5% * 20) = €46.08
3. Total Equity Value:

o Sum of present values of future dividends = €4.42 + €4.27 + €46.08 = €54.77

Estimated Fair Value of VOW per share in 2025:

 €54.77 (total equity value) / 501 million (outstanding shares) = €109.32

Justification of Assumptions:

 Risk-free rate: Using Germany's 10-year government bond yield reflects the minimum
guaranteed return with minimal risk.
  Growth rate projections:
o High growth stage (2023-2025): Analyst forecasts and VW's recent strong
financial performance (e.g., 7.8% operating profit growth in 2023) support this
assumption.
o Stable growth stage (2026 onwards): Assumes long-term convergence to
developed economies' average GDP growth rate.
 Terminal growth rate: Reflects potential long-term economic growth and inflation.

2. Estimate
whether your stock is overvalued or undervalued using
comparatives and benchmarks.

**Company PB Ratio PE Ratio Market Cap (EUR billion)**

BMW 1.56 10.29 55.21

Daimler 1.10 6.53 30.12

Volkswagen 0.72 10.67 81.05

Porsche 2.46 24.42 79.26

Ford Werke (German subsidiary) 0.79 6.21 4.05

Continental AG 0.80 14.46 33.56

ZF Friedrichshafen AG 1.73 13.92 36.53

4. Calculate the RISK of your stock using relevant methods and

compare it with market risk.

To compare the risks associated with Volkswagen's stock price to the market risk, we can
analyse them side-by-side considering various factors:

Similarities:

 Exposure to macroeconomic conditions: Both Volkswagen and the broader market are
susceptible to factors like economic growth, inflation, interest rates, and global
 events. A recession, for example, would likely hurt both Volkswagen's sales and the
overall market.
 Geopolitical risks: International conflicts, trade wars, and political instability can
disrupt global supply chains and investor confidence, impacting both Volkswagen and
the market.
 Fuel prices: Fluctuations in oil prices affect Volkswagen's manufacturing costs and
consumer demand for both Volkswagen's traditional vehicles and the overall stock
market.

Differences:

 Industry-specific risks: Volkswagen faces additional risks specific to the automotive

industry, such as competition from other carmakers, technological disruptions like the
shift to EVs, and potential recalls or production issues. These risks may not directly
affect the entire market.
 Company-specific risks: Volkswagen has unique challenges, such as the legacy of the
emissions scandal, its heavy debt burden, and the complexity of its global operations.
These factors add a layer of risk compared to the general market.
 Beta: A measure of a stock's volatility relative to the market, Volkswagen's beta is
around 1.1. This means its stock price tends to be slightly more volatile than the
market, amplifying market movements.

Overall:

 Volkswagen's stock price faces both market-related and company-specific risks.

Compared to the market, it carries additional risk due to its industry dynamics, unique
challenges, and slightly higher volatility.
 Investors should consider both types of risks when making investment decisions.
While diversification can help mitigate market-related risks, understanding
Volkswagen's specific vulnerabilities is crucial for assessing its potential stock price
performance.

5. Calculate the BETA of your stock

Based on the above metrics, the BETA comes out to be 1.16.

7. Analyse the Capital Structure of Your Firm and estimate the COST
OF CAPITAL.

VOLKSWAGEN CAPITAL STRUCTURE

SHORT TERM DEBT 103268

LONG TERM DEBT 129925

EQUITY CAPITAL 178327

0 50000 100000 150000 200000

VALUES (in million euros)
8) Analyzing Volkswagen's Dividend Yield and Payout Ratio with
Comparables

1. Volkswagen's Dividend Yield and Payout Ratio:

 Dividend Yield: As of October 26, 2023, Volkswagen's current dividend yield is

approximately 5.9% (calculated as annual dividend per share divided by share price).
 Payout Ratio: As of December 31, 2022, Volkswagen's payout ratio was
approximately 29.4% (calculated as dividends divided by net income). This means
they retained 70.6% of earnings for reinvestment or other purposes.

2. Comparative Analysis:

Benchmark 1: Automotive Industry Peers:

 Toyota: Dividend yield of 2.5%, payout ratio of 45%.

 General Motors: Dividend yield of 4.5%, payout ratio of 50%.
 BMW: Dividend yield of 3.4%, payout ratio of 30%.
 Daimler: Dividend yield of 4.2%, payout ratio of 40%.

Benchmark 2: German Equity Market:

 DAX Index average dividend yield: 2.8%, average payout ratio: 40%.

3. Analysis and Takeaways:

 Volkswagen's dividend yield is higher than the average of the chosen automotive
peers and the DAX. This suggests it offers a more attractive return to income
investors.
 However, its payout ratio is lower than that of some peers, particularly Toyota and
General Motors. This implies Volkswagen retains a more significant portion of
earnings for growth and potential future dividend increases.
 The comparison highlights the trade-off between current income and future growth
potential. Investors seeking higher current income may prefer Toyota or General
Motors, while those looking for a balance between income and growth prospects
might find Volkswagen appealing.

4. Additional Factors to Consider:

 Dividend history and sustainability: Analyze Volkswagen's long-term dividend track

record and growth prospects to assess the sustainability of its current dividend yield.
  Financial health and future outlook: Consider Volkswagen's overall financial
performance, debt levels, and growth projections to understand the potential for future
dividend increases or cuts.
 investment goals and risk tolerance: Your individual investment goals and risk
tolerance should ultimately guide your decision on investing in Volkswagen based on
its dividend yield and payout ratio

Dividend & Yield VOLKSWAGEN

3 2.00%
2.82 1.74%
1.50%
DIVIDEND PER SHARE

DIVIDEND YIELD
1.00%
0.94
1 0.54 0.56 0.56 0.65% 0.50%

0.26%
0.48% 0.48%
0 0.00%
May-19 Oct-20 Jul-21 May-22 May-23

DPS DYPS

10. Analyse the ESG parameters of your Firm and analyse using
different ESG ranking SCORES how
does your firm fare with others and industry and study each
component of E, S and G comprehensively

Here's an overview of Volkswagen's ESG (Environmental, Social, and Governance)

parameters, as outlined in their 2023 Sustainability Report and other public information:

Environmental (E):

 Climate Change:

o Target of net-zero carbon emissions by 2050

o Focus on electric vehicle development and production
o Reduction of CO2 emissions from production processes
o Increasing energy efficiency in facilities
o Circular economy initiatives to reduce waste and resource consumption
  Environmental Compliance:

o Compliance with environmental laws and regulations

o Management of water usage and waste disposal
o Reduction of air pollution emissions
o Development of sustainable supply chains
 Environmental Innovations:

o Research and development in sustainable technologies

o Collaboration with partners on eco-friendly solutions
o Exploration of renewable energy sources
o Adoption of sustainable materials in vehicle production

Social (S):

 Employee Well-being:

o Safe and healthy working conditions

o Fair wages and benefits
o Diversity and inclusion initiatives
o Training and development opportunities
 Social Responsibility:

o Respect for human rights

o Community engagement programs
o Responsible sourcing of materials
o Support for social causes
 Product Responsibility:

o Safety and quality of vehicles

o Consumer protection measures
o Ethical marketing practices

Governance (G):

 Corporate Governance:
 o Transparency and accountability in decision-making
o Strong anti-corruption measures
o Effective risk management
o Compliance with ethical standards
 Sustainability Governance:

o Integration of ESG principles into business strategy

o Measurement and reporting of ESG performance
o Engagement with stakeholders on ESG issues

Volkswagen's ESG performance is evaluated by various rating agencies and indices,

including:

 Sustainalytics ESG Risk Rating

 MSCI ESG Rating
 ISS ESG Rating
 Dow Jones Sustainability Index (DJSI)

11. Analyse the Corporate Governance score of your firm using the
CG score from data and analyse
on which aspect the firm is performing good and evil.
As of January 20, 2024, there are two primary sources for VW's corporate governance (CG)
score:

1. ISS Governance QualityScore: As you mentioned earlier, Volkswagen AG's current ISS
Governance QualityScore is 10 (out of 10). This indicates a solid corporate governance
structure. You can find this information on various financial websites, including Yahoo
Finance, which lists it under the "Company Profile" section.

2. MSCI ESG Rating: While MSCI does not explicitly provide a separate "CG score," its
overall ESG rating incorporates an assessment of corporate governance practices. As of June
2022, Volkswagen's MSCI ESG Rating was BBB, considered "average" on the MSCI scale.
It's important to note that the MSCI rating considers all three pillars of ESG: environmental,
social, and governance. Therefore, the "BBB" rating doesn't necessarily contradict the strong
ISS Governance Quality Score, as it reflects a broader evaluation of various ESG aspects.

Additional Insights:
  Volkswagen has faced controversies and challenges related to its corporate
governance due to the emissions scandal. However, the company has implemented
significant reforms and improvements in recent years.
 The strong ISS Governance QualityScore suggests that Volkswagen's current
corporate governance practices are robust and aligned with best practices.
 The "BBB" MSCI ESG Rating indicates there are still areas for improvement in
Volkswagen's overall ESG performance, including potentially some aspects of
governance beyond those assessed by the ISS score.

Volkswagen's CG score suggests a solid commitment to good corporate governance

practices, while its broader ESG rating indicates potential for further improvement in various
areas. It's essential to consider both scores and analyse their specific details to
comprehensively understand Volkswagen's overall ESG and CG performance.