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PBL ASSIGNMENT PART C
BSB 6300 Corporate Finance
MUSTAFA ALI MOHSEN (201102031)
Tutor: Fahad Ali
Q1:
Dividend Valuation Model: is model used to evaluate the share price by predicting the future
dividends and discounting them by the present value. Higher DVM value than the trading share
price suggests that the share price is undervalued. (Investopedia, 2009)
Comparing findings:
Based on the dividend valuation model the intrinsic value of Sainsbury’s share is 343.44, and
the share price in December 2008 was 365 pence. As result of these findings, we can say that
the share price is overvalued and based on this figure only this investment is bad.
Year
Growth
2008
Dividend
PV of Dividend
13.20
2009
8%
14.26
13.10
2010
2011
2012
2013
SS
9%
9%
8%
7%
4%
15.54
16.94
18.29
19.57
20.36
13.13
13.15
13.05
12.84
278.17
DVM Share Value
343.44
Assumptions:
We will assume that the beta will not change in the coming years because Sainsbury is a
defensive, matured and large corporation and it need large transactions to be affected, and the
same for the risk free rate as we will assume that the market will be stable.
In the other hand, in the calculations we have assumed that the risk premium will be fixed over
the coming years at 6%, and if we assumed that the risk premium will decrease in the coming
years then the share value will increase.
Furthermore, assuming that the Dividends will be growing at the riskless rate of 4% to infinity
after 2013 is unrealistic. Therefore, if we assumed that there will be an increase in the growth
rate for the dividend after 2013 then there will also be an increase in the share value.
Q2:
The Free Cash Flow model: is used to evaluate the financial performance of a company, as the
free cash flow shows how much the company can generate after paying its expenses.
(Investopedia, 2009)
Comparing findings:
As Estimated by the free cash flows valuation model the Sainsbury enterprise value is 434.07,
while the company share price in December 2008 was 365 pence; As a result of this estimation
we can say that the share price in 2008 was undervalued, therefore investing in this share
based on this estimation only will successful in the future.
Terminal Value
PV of Terminal Value
PVFCF(2009-2013)
Enterprise Value
Value of Debt
Value of Equity
NOSH
FCF PPS
14,866.11
10,681.85
1,148.15
11,830.00
2,331.00
9,499.00
1753
541.87
Assumptions:
In the calculations we have assumed that the sales growth rate will stay at steady state of 4%
over the coming years after 2013, which is not realistic. If we assumed that the growth will
increase in the coming years then the FCF PPS will increase significantly.
Furthermore if we assumed that the risk premium is going to decrease in the coming years,
then the FCF PPS will also increase.
Q3:
Comparing findings to DEC.2008:
Based on the Multiples Valuation Model the share value for Sainsbury is estimated at 448.51, and
the actual share price in December 2008 was 365 pence. Therefore, based on this evaluation only
we can tell that the share price is undervalued and we can assume that investing on this share will
be good investment.
EPS x CompP/E
290.33
Book Value x Comp P/B
594.99
CF * P/CF
418.77
EBITDA x Comp EV/EBITDA
Value of Equity
PPS
10193.46
7862.46
448.51
Comparing findings to Tesco:
Sainsbury's
Tesco
comment
Trailing P/E --> PPS/EPS
The P/E ratio shows how much the
investors are willing pay for the
company’s share in comparison to the
company’s earnings. The lower the
better.
20.45
14.20
We can clearly see that Tesco has a
higher P/E ratio than Sainsbury has,
which means that the investors have to
pay less for their earnings.
with Sainsbury’s the investors will have
to pay 20.45 GDP for each 1 GDP of
earnings they gain each year, which
means that it will take from the
investors 20.45 years to cover their
investing expenses. While in Tesco they
have to pay 14.20 only for each 1 GPD
of earnings.
As a result, Tesco has a better P/E ratio
than Sainsbury’s.
Forward P/E -->PPS/EPSt+1
15.33
13.11
On the other hand, it is obvious that
Sainsbury's is closing the gap between
them and Tesco in the future. As a
result the Forward P/E ratio is almost
similar to Tesco, but Tesco is still better
with 13.11 P/E ratio.
P/B
P/B ratio shows how much investors
are rating the company’s stock value
in compression to its book value. The
higher the better.
Any ratio above 1 means that the
investors believe that the company
will grow and expand in the future.
Based on the P/B ratio, it seems that
the investors have a more optimistic
view of Tesco's shares with a ratio of
2.38 in comparison to Sainsbury’s 1.36.
1.36
2.38
The 1.36 ratio means that Sainsbury's
stock price costs 1.36 times as its assets
could be sold for, and it is actually a
positive sign for Sainsbury which means
that the investors believe that the
shares worth more than the assets as
they might grow in the future.
P/CF
7.07
8.72
Based on the P/CF ratio, Tesco shares
are more attractive for the investors
than Sainsbury’s
EV/EBITDA
EV/EBITDA is a more accurate
alternative for P/E ratio.
Using this ratio we can determine
whether the share price of a company
is expensive or cheap, and in more
accurate way than P/E ratio we can
evaluate the share price
6.90
8.49
As a result of the EV/EBITDA ratio, it is
obvious that Sainsbury is valued under
Tesco but both of them are close in the
valuation.
Multiples Valuation Model pros & cons:
Advantages
Disadvantages
1- It requires very easy calculations.
1- It can be affected significantly if the
company uses a different accounting method
to calculate revenue.
2- It doesn't depends on assumptions like
other valuation methods.
2- This method of valuation depends on
historical data or near future forecasts, which
means that this method won't be able to give
the investor a clear valuations long-term
future.
3- Finding a similar company to be used for
the comparison can be difficult, especially if
the company that is being evaluated has a
unique kind of business.
3- The information that this model
provided can be very helpful for
investors to make an accurate
investment decision.
(Thepersonalfinancier.com, 2007)
References
Investopedia, (2009). Dividend Discount Model (DDM) Definition | Investopedia. [online]
Available at: http://www.investopedia.com/terms/d/ddm.asp [Accessed 24 May. 2014].
Investopedia, (2009). Free Cash Flow (FCF) Definition | Investopedia. [online] Available at:
http://www.investopedia.com/terms/f/freecashflow.asp [Accessed 24 May. 2014].
Thepersonalfinancier.com, (2007). Using Multiples for Valuations: Pros and Cons | The
Personal Financier - A Personal Finance Blog. [online] Available at:
http://www.thepersonalfinancier.com/2007/11/using-multipliers-for-evaluations-pros.html
[Accessed 24 May. 2014].