Valuation Project Report

valuation project report Valuation of the Incentive Stock Options for Procter & take chances Co. Name Haining Jiang Comp some(prenominal) background In this paygrade project, I all(a)ow for analyze a corpo symmetryn which is mature and I am evoke in. The name of the company is Procter & Gamble Co. the Procter & Gamble Company, together with its subsidiaries, engages in the do and sale of a range of branded consumer packaged goods. The company ope regularizes in five segments Beauty, Grooming, Health attending, Fabric Care and Home Care, and Baby Care and Family Care.In the class 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 run damage and dividend which are $ 1. 7 and $ 0. 01 per month respectively in 19 Jan. 1970. For many years, P & G keep following their purpose and sociable respo nsibility at every and every corner in the demesne We confound provide branded products and services of superior quality and care for that improve the lives of the cosmeas consumers, now and for generations to come.As a result, consumers depart take us with leadership sales, profit and value creation, allowing our people, our shareholders and the communities in which we live and bring in 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 military rank The most basic model is the Gordon Growth Model, which prices the stock by the dividend and next result of dividends. The locution would be like this V0=D0 (1+g)(r-g)=D1r-gWhere D0 is todays dividend, which would be $ 2. 21 in our case. r is the cost of capital, r leave behind be calculated like Assume The market premium = 6%* The riskless value = 3%* Given count in the case ? = 0. 27 So, r = 0. 03 + 0. 27 x 0. 06 = 4. 62% The best way to reckon g is The term g can be viewed as the drop dead on owners equity times the earnings memory board rate b. b = (1 dividend payout ratio) = 1 58% = 42% return on equity = 14. 05% So, Sustainable stickth rate = gs = 42% x 14. 05% = 5. 901% r g, so we may meet a big problem when using the V0 locution above. notwithstanding, as far as we all know, it is not possible that the fast can grow faster than r forever. The high return allow attract other investors into the market to compete and the firms rate give eventually fall. And, I determine the long-run ontogenesis rate of dividends, gL = 3%*. g r. Even if this data is not real(a) in the true P&G case, I think its will be fine to continue 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 two parts.The first is the supernormal growth soma 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 calculated above) n = 3* At the second period ( r g ) r = 4. 62% (as we calculated 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 experient a life-cycle with a three stages that are an early, development stage with high growth, a maturing phase with moderate growth, and a declining phase with little, no, or banish growth. The current dividend of $ 2. 21 per share will not change. Dividends are expect to grow at a rate of 10%* for 2 years. next that, the div idends 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 unvaried 4. 2% (as calculated in 1. 1). We can break the calculation in to six steps (1) puzzle out 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 present value of each 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 value of dividends in yea rs 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 catch at an equation for the price earnings ratio in scathe of dividend payout, required rate of return, and growth P0E0= Dividend payout ratio x (1+g)r-g We can decide the information infra according to the above formula Increase in dividend payout rate will cause increase 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 lower in P/E ratio Increase i n growth rate will cause increase in P/E ratio. (2) we can also use the DVM to relate the price-book value ratio to factors such(prenominal) 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 weigh in that location 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 understanding through DVM. 4) What if there no dividends? I think its acceptab le and expectable if the P&G isnt paying dividends now, scarce 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. Summary Valuation is the process of determining what something is worth at a point in time. When we value investings, we want to estimate the future cash flows from these investments and then give notice 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 tel l us a definitely reason we theater of operations 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.