1. 1
Cohort 8, 2012
MBA. Management (Genral Route)
Financial Management
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Different Approaches for Estimating the Intrinsic Value
of a Common Stock.
VS.
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2. 2
1) Discounted Dividend Model (DDM / Gordon )
UPS FeDex
ROE 48.46% ROE 8.98%
Beta 0.92 Beta 1.29
Rf 4.3 Rf 4.3
Mr 10% Mr 10%
EPS 3.83 EPS 4.15
Div 2.08 Div 0.48
St. price 74.14 St. price 93.58
Let’s calculate Intrinsic Value for both companies.
g = ROE x (EPS-DPS) g =ROE x ( EPS – DPS)
EPS EPS
= 0.4846 x ( 3.83 – 2.08) = 0.0898 x (4.15-0.48)
3.83 4.15
= 0.2214 =0.0794
= 22.14% =7.94%
k = Rf + β ( Mr – Rf ) k = Rf + β ( Mr – Rf )
= 4.3%+0.92(10%-4.3%) =4.3% + 1.29 (10%- 4.3%)
= 9.54 =11.65
As we see the g of UPS Corp is higher than k so the constant growth formula leads to a negative
stock price, which does not make sense. So we can’t use this model.
3. 3
2) Firm multiples method. P/E
UPS FeDex
P 74.14 P 93.58
EPS 3.83 EPS 4.15
P/EPS 74.14/3.83= 19.35 P/EPS 93.58/4.15=22.54
P/E/G 19.35/22.14=0.87 P/E/G 22.54/7.94= 2.83
P/E/G of the industry is 1.45
As we notice the price is overvalued for both companies (0.87< 74.14), (2.83<93.58 ) so my
recommendation is to sell.
UPS is in a better position because the ratio is lower, compared with
The industry its P/E/G is better
3) Enterprise value / Earnings
UPS FeDex
Mkt 73 210 000 Mkt 29 780 000
Cap Cap
LTD 10 491 000 LTD 1 668 000
CASH 3 370 000 CASH 1 952 000
NI 3 488 000 NI 1 184 000
= Mkt + Ltd – Cash/NI = Mkt + Ltd – Cash/NI
4. 4
=(73 210 000 + 10 491 000 )-3 370 000 =(29 780 000+1 668 000) -1 952000
3 488 000 1 184 000
= 23.03 =24.91
24.91 = 24.91= 3.13
23.03 = 23.03= 1.04 g 7.94
g 22.14
Again compared with the market prices the values I found are overvalued so I recommend to
sell. UPS is the Winner again as a result of the lowest ratio.
