Case Study 1

A192 (FEB) SECOND SEMESTER SESSION 2019/2020
BWFN3013 INVESTMENT ANALYSIS (GROUP B)
TITLE OF ASSIGNMENT:
CASE STUDY 1: EQUITY ANALYSIS AND VALUATION
SUBMITTED TO:
AFIRUDDIN BIN TAPA
PREPARED BY:
BIL. NAME NO.MATRIC

1 SITI NABILAH BINTI NASIP 254446
DATE OF SUBMISSION:
12 JULY 2020
1. Disney stock’s intrinsic value

a) Constant growth model
Value of stock = D1/(r-g)
g = growth rate of return = 17.7%
r = return on equity = 28%
EPS in 2020 = $6.19
D1 = EPS*20% = $1.238
Value of stock = 1.238/(28%-17.7%) = $12.02
b) Multi-Stage Growth Model

Value of stock = D0 (1+g) / (r-g)
D0 = Current dividend
g = growth rate of return = 17.7%
r = return on equity = 28%
*company paying out the remaining 20.0% in dividends.
*stock price = $140
Now return on equity = 28% of $140 = $39.2

Dividend = 20% of return on equity = 39.2*20% = $7.84
Value of stock = $7.84*(1+0.177) / (0.28-0.177) = $89.59
c) Discounted Dividend Model

Value of stock = D/ (k-g)
D = Dividend
k = required rate of return or rate of equity
g = growth rate
r = return on equity
Dividend -= if 100 dollar per share then dividend at the rate of 17.7 Percent equals
to 17.7 dollar
g = r*retention ratio = 28*80% = 22.4
Value of stock = 17.7 / (28-22.4) = $3.16
d) Market Multiples Approach
The average of P/E = (25.5 + 21.9 + 19.1 + 14.1) / 4 = 20.15
Value of stock = average P/E * EPS
= 20.15*6.60
= $132.99
2. Strengths and weaknesses of each valuation approach.

a. Constant growth model
The advantages:
 The Gordon Growth Model is especially useful for companies that have a
great cash inflow and the company has stability with dependable leverage
patterns.
 The valuation can be easily performed since the inputs of data for Gordon’s
Growth model are readily available for computation.
 The Gordon Growth model has been proven to be favorable to real estate
agents and several real estate ventures too.
The disadvantages:
 The simple calculations can prove to be the major disadvantage as the model
takes into consideration the quantitative figures and not the qualitative
ones.
 The future changes cannot be taken into consideration which is why this
model is not much preferred.
 The calculations are basically on future assumptions, which can be subjected
to market changes based on the economic conditions and various other
factors which contribute to being one of the major disadvantage.
 The limitations to the model make it less favorable for market and
companies which has rapid changing dividend patterns.
b. Multi-Stage Growth Model

Advantages:
 Reverse Logic: Multi-stage model need not be applied only to find the
correct intrinsic value of the share. Instead, given the current share price, a
reverse analysis can be conducted and the growth rate being implied in the
current market price can be found out.
 Scope: Multistage model is applicable to most companies, especially if the
company has a relatively mature and stable business. Also, it can be used to
find out if the indices are valued correctly or whether the market is amidst a
bubble.
Disadvantages:
 Precision Required: The multistage model is highly sensitive to changes in
inputs. Hence, for the model to be accurate, the inputs have to be forecasted
very accurately. The problem is that these inputs cannot be forecasted with
a great degree of precision by investors.
 Non Linear Growth Patterns: The multistage model assumes a constant
growth rate. This makes the growth of the company’s dividends appear
linear. In reality, empirical evidence has proven that dividend growth is
seldom linear. The reason behind this is the existence of business cycles.
During boom times, companies experience a surge in earnings and pay out
generous dividends and during lean times they pay out lesser dividends.
c. Discounted Dividend Model

Advantages:
 Easy to compute - the DDM has a simple formula that can be used to
compute the value of the stock.
 Not subjective - As we are using dividend to measure the value, there is no
subjectivity involded. In case of free cash flow and net income there can be
ambiguity.
 Minority control - Is is useful to compute the value of a share in case you are
a minoity shareholder. Dividends are not determined by the decisions of the
minority shareholder and hence DDM takes a perspective of a minority
shareholder.
Disadvantages:
 Limited usage - This model is only applicable to firm that are mature and
have a consistent dividend and growth for a lifetime.
 Not related to earnings - The DDM consider the dividend paid by a company
and not the earnings of the company while computing the value. It expects
that the dividend will increase the earnings of a company increased but this
does not happen always.
 Applicability- the DDM is not applicable to the shareholders who have a
control over the company's decisions. Dividend is not a relevant factor for
them as they can control it.
d. Market Multiples Approach

Advantages
 It is straightforward and involves simple calculations.
 It uses data that is real and public.
 It is not dependent on subjective forecasts.
Disadvantages
 It is difficult to identify transactions or companies that are comparable. There is
usually a lack of a sufficient number of comparable companies or transactions.
 It is less flexible compared to other methods.
 The method raises questions on how much data is available and how good the
data is.

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A192 (FEB) SECOND SEMESTER SESSION 2019/2020

BWFN3013 INVESTMENT ANALYSIS (GROUP B)

CASE STUDY 1: EQUITY ANALYSIS AND VALUATION

AFIRUDDIN BIN TAPA

BIL. NAME NO.MATRIC

1. Disney stock’s intrinsic value

Value of stock = 1.238/(28%-17.7%) = $12.02

b) Multi-Stage Growth Model

Now return on equity = 28% of $140 = $39.2

Value of stock = $7.84*(1+0.177) / (0.28-0.177) = $89.59

c) Discounted Dividend Model

Value of stock = 17.7 / (28-22.4) = $3.16

d) Market Multiples Approach

The average of P/E = (25.5 + 21.9 + 19.1 + 14.1) / 4 = 20.15

Value of stock = average P/E * EPS

2. Strengths and weaknesses of each valuation approach.

b. Multi-Stage Growth Model

c. Discounted Dividend Model

d. Market Multiples Approach

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