This is a project example from MNQ, where the name has been changed. The financial overview here is for review purposes. Contact Scott Brown Realty at 972-464-7799 or visit www.USAHouses.org anytime.
1. MNQ COMPANY FINANCIAL ANALYSIS Scott Brown Managerial Finance August 27, 2011 Texas Real Estate Broker 972-464-7799 www.USAHouses.org
2. TOPICS ANALYZED FINANCIAL RATIOS VALUATION OF STOCK ANALYSIS NPV AND SENSITIVITY ANALYSIS CAPM AND BETA ON STOCK PORTFOLIO COST OF CAPITAL CASH CONVERSION & OPERATING CYCLES
6. VALUATION OF MNQ STOCK ANALYSIS Valuation of stock is expressed as: P0=Div1/(R-g), Where P0 is the current value of the stock, Div1 is the expected dividend payment next period, R is the discount rate or required rate of return by an investor, and g is the rate of growth expected.
7. VALUATION OF MNQ STOCK ANALYSIS Using our formula with constant growth, as P0=Div1/(R-g), we see the stock price, P0 is $21 now. The expected dividend to be paid next period is probably the same as the current dividend of $0.725 per share times the anticipated rate growth factoring to calculate future value of this dividend payment. The next dividend payment would be about 80 cents each per share per period based on 10.43% growth estimates. If 21 =.80/(R-g), then 21 (R-g) is equal to .80 and that would mean (R-g) would be equal to .80/21. We find then since (R-g) is .0381, that R is .1043-.0381 with my estimates, which is .0662, or 6.62% with these estimates and numbers given. If I used $3.20 for Div1 then I would say R is 3.2 / 21, or 15.24%. The stock is priced at $21 per share, and it’s intrinsicvalue is pretty close to that at $20.89. It seems that MNQ’s stock is fully priced.
8. NPV AND SENSITIVITY ANALYSIS Assume a project has the following forecasted cash flows: Net Present Value (NPV) =Discounted Cash Flow Valuation (DCF) As far as our sensitivity analysis goes, we measure the change incrementally while we modify the inputs of an isolated variable. For instance, we may change the growth rate or the required rate of return. Either way, we see the changes and can monitor each factor better when we know they have a larger impact.
9. NPV AND SENSITIVITY ANALYSIS In order to decide whether or not to accept or reject a project such as this, it would be wise to calculate the Internal Rate of Return (IRR), the Net Present Value (NPV), the Modified Internal Rate of Return (MIRR), and payback period of the project. NPV > 0 Accept Project NPV < 0 Reject Project NPV = 0 Indifferent (RRR = IRR) NPV process of valuing an investment or project by discounting its future cash flows Decision Rule: 9
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11. Ross, Westerfield, and Jaffe, (2010, page 376) attempt to explain how to find the beta and expected values for stock portfolios and have given us the following formula to calculate them: “The return on a portfolio is determined by three sets of parameters: 1. The expected return on each individual security, i. 2. The beta of each security multiplied by the factor, F 3. The unsystematic risk of each individual security, ∈i The beta for MNQ Company is 0.85. Given a risk free rate (Rf) of 5% & a Market Risk Premium (MRP) of 6%. MRP = (Rm – Rf) and R = Rf + (B * MRP), where R is the return expected per our stock, B is the stock beta, Rm is the risk associated within the market. Since we know that, we can also say that Rm = MRP + Rf, and therefore Rm = 11%. R = 5% + (.85*.06) = 10.1% (Expected return for MNQ)
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13. COST OF CAPITAL WACC: Weighted Average Cost of CapitalOverall Required Return For FirmDiscount Rate For Cash Flows Similar In Risk To Overall Firm WACC = (E/V) x RE +(P/V) x RP + (D/V) x RD x (1- TC) Where: (E/V) = % of common equity in capital structure (P/V) = % of preferred stock in capital structure (D/V) = % of debt in capital structure RE = firm’s cost of equity (CAPM or Dividend Model) RP = firm’s cost of preferred stock (D/P0) RD = firm’s cost of debt (YTM) TC = firm’s corporate tax rate Weights Component costs
