Valuation Project Report

valuation project report Valuation of the Incentive Stock Options for Procter & Gamble Co. Name Haining Jiang Comp any background In this valuation project, I impart analyze a company which is mature and I am interest in. The name of the company is Procter & Gamble Co. the Procter & Gamble Company, to fatherher with its subsidiaries, engages in the manufacture and sale of a tramp of branded con inwardnesser packaged goods. The company ope regularizes in five segments Beauty, Grooming, Health C atomic figure 18, Fabric C are and Home Care, and bumble Care and Family Care.In the year of 1837, William Procter and James Gamble settled in the Queen City of the West, Cincinnati, and established themselves in business. As a result, a new company was born Procter & Gamble. Procter & Gamble became into a listed company at a stock price and dividend which are $ 1. 7 and $ 0. 01 per month respectively in 19 Jan. 1970. For galore(postnominal) age, P & G keep following their purpose and s ocial responsibility at all and every corner in the world We will provide branded products and services of superior quality and foster that improve the lives of the worlds consumers, now and for geneproportionns to come.As a result, consumers will reward us with leadership sales, pull ahead and value creation, allowing our people, our shareholders and the communities in which we live and work to prosper. Until now, P & G has become the largest consumer packaged goods company in the world at $ 67. 17 of the share price and $ 0. 562 of dividend per month. Main contents 1. Discounted dividend valuation The most sanctioned model is the Gordon Growth Model, which prices the stock by the dividend and future growth of dividends. The formula would be like this V0=D0 (1+g)(r-g)=D1r-gWhere D0 is at onces dividend, which would be $ 2. 21 in our case. r is the cost of capital, r will be metric like Assume The market premium = 6%* The risk-free rate = 3%* Given digit in the case ? = 0. 2 7 So, r = 0. 03 + 0. 27 x 0. 06 = 4. 62% The best way to cipher g is The term g can be viewed as the upshot on owners equity times the earnings retention rate b. b = (1 dividend payout symmetry) = 1 58% = 42% return on equity = 14. 05% So, Sustainable growth rate = gs = 42% x 14. 05% = 5. 901% r g, so we may get wind a big problem when using the V0 formula to a higher place.But, as far as we all know, it is non possible that the firm can grow faster than r forever. The high return will pass another(prenominal) investors into the market to compete and the firms rate will even outtually fall. And, I restrain in the long-run growth rate of dividends, gL = 3%*. g r. Even if this data is not actual in the true P&G case, I think its will be fine to play along our model. V0=D0 (1+g)(r-g)= $ 2. 21x(1+0. 03)(0. 0462-0. 03)=$ 140. 51 1) Two-stage dividend growth When the P & G is growing faster than r, one can use a multistage model, where the growth stages are broken into tw o parts.The first is the supernormal growth phase call gs , which is the rate that is higher than r. So we can assume at the first period ( r g ) gS = 5. 901% (as we calculate above) n = 3* At the second period ( r g ) r = 4. 62% (as we careful above) gL = 3% (as we calculated above) D0 = $ 2. 21 (real data from P&G) As we all know the formula is V0 = t=1n Dt1+rt+ Vn(1+r)n Vn= D01+ gsn(1+ gL)(r- gL) So, V3= 2. 211+ 0. 0593(1+ 0. 03)(0. 0462- 0. 03) = $ 166. 88 V0 = 2. 21x(1+0. 059)1(1+0. 0462)1+ 2. 21x(1+0. 059)2(1+0. 0462)2+ 2. 21x(1+0. 059)3(1+0. 0462)3+ 166. 88(1+0. 0462)3 = $ 152. 27 2) Three-stage dividend growth We assume the P & G company go through a life-cycle with a three stages that are an early, development stage with high growth, a maturing phase with check growth, and a declining phase with little, no, or negative growth. The current dividend of $ 2. 21 per share will not change. Dividends are pass judgment to grow at a rate of 10%* for 2 years. Following that, the dividends are expected to grow at a rate of 8%* for 2 years. After the total 4 years, the dividends are expected to grow at a rate of 4%* per year, forever. The rate of return unchanged 4. 2% (as calculated in 1. 1). We can break the calculation in to six steps (1) imagine the dividends for years 1 through 5 year Dividend growth rate Dividend 1 10% 2. 431 2 10% 2. 674 3 8% 2. 888 4 8% 3. 119 5 5% 3. 275 (2) Calculate the hand over value of each(prenominal) of these dividends for years 1 through 5 Year Dividend Present value 1 2. 431 2. 3236 2 2. 674 2. 4430 3 2. 888 2. 5220 4 3. 119 2. 6035 5 3. 275 2. 6130 (3) Calculate the present value of the dividends beyond year 4 P4= $ 3. 275(0. 0462-0. 04) = $ 528. 23 (4) Calculate the present value of the price at year 4PVP4 = $ 528. 23(1+0. 0462)4 = $ 440. 92 (5) Calculate the sum of the present value of the dividends PVdividends in year 1-4= t=110Dt(1+0. 0462)t = $ 12. 51 (6) Calculate the price today as the sum of the present valu e of dividends in years 1-4 and the price at the end of year 4 P0=$ 440. 92+$ 12. 51 = $ 453. 43 3) The uses of the dividend valuation models (1) The price-earnings ratio also known as the price-to-earnings ratio or PE ratio, is the ratio of the price per share to the earnings per share of a stock. Let us observe these data from P&G firstly ? 2012 2011 2010 stock price $66. 6 $64. 50 $60. 44 current earings per share $3. 82 $4. 12 $4. 32 P/E ratio 17. 37173 15. 65534 13. 99074 dividend payout ratio 58% 50% 42% If we take the DVM and divide both sides by earnings per share, we arrive at an equation for the price earnings ratio in terms of dividend payout, required rate of return, and growth P0E0= Dividend payout ratio x (1+g)r-g We can conclude the development below according to the above formula Increase in dividend payout rate will cause add in P/E ratio, this point is also obviously in the table above, the data comes from the real P&G case.Increase in r will cause decrease in P/ E ratio Increase in growth rate will cause plus in P/E ratio. (2) we can also use the DVM to relate the price-book value ratio to factors such as the dividend payout ratio and the ROE. We assume the B0 indicate the current book value per share and ROE0 indicate the current return on book equity. As we all know ROE0 = E0B0 , and P0=D0 (1+g)(r-g)=D1r-g So, we can get the formula easily below P0=B0x ROE0 x D0E0x (1+g)(r-g) So we could get the conclusion through analyzing the above formula increase in B0 will increase in P0 ncrease in ROE0 will increase in P0 increase in D0E0 will increase in P0 increase in g will increase in P0 increase in r will increase in P0 I believe there are plenty of other conclusions we can get from those formulas, I just mention some of them in my valuation report here. But in other words, we can fully use the DVM to find all the related fundamental factors to have further judgement through DVM. 4) What if there no dividends? I think its acceptable and expe ctable if the P&G isnt paying dividends now, further chooses to reinvest its money.It is a sign that the dividends in the future will be even larger. Of course, I wont stick around with the company long enough to receive any of those dividends. But because of the growth of the company, I will realize that the eventual dividends will be even larger with the increasingly share price. After that, I can sell me shares to someone else to get my profit from it. analysis Valuation is the process of determining what something is worth at a point in time. When we value investments, we want to estimate the future cash flows from these investments and then discount these to the present.This process is based on the reasoning that no one will pay more today for an investment than what they could expect to get from that investment on a time and risk adjusted basis. 1 I think the paragraph I cited above not only give us the best conclusion of by valuation project report, but also tell us a def initely reason we study finance. Please Note If the number followed a * behind it, it means this number is assumed and the others without * are all real data from P&G company finance report. 1 cited from the Dividend Valuation Models, by Pamela Peterson Drake, Ph. D. , CFA.