Market multiple model
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The document summarizes the use of the market multiple model to value McDonald's stock. It analyzes McDonald's growth rate, risk, and return on equity compared to peers and finds McDonald's to be average. It then estimates McDonald's price/earnings and price/cash flow ratios based on its peers' ratios, finding McDonald's ratios to be higher than justified. Adjusting the ratios lowers the estimated stock prices, suggesting the current price is too high. Revenue multiples also indicate the current price is higher than justified based on McDonald's being an average company.
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Week 6 Weekly Briefing
Welcome to Week 6! In Week 5, you studied standard costs and variances and their
relationship to decision making. You analyzed the results of the direct labor and direct
materials variances and discussed possible causes for the variances. All of these terms
were added to your accounting vocabulary.
In Week 6, you will continue to build your accounting vocabulary as you study sunk
costs, opportunity costs, accounting costs, and break-even analysis.
This week:
In terms of the specific Learning Objectives, you will:
• Analyze the impact on the organization of sunk costs, opportunity costs, and
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• Determine the impact of cost decisions
• Apply appropriate accounting processes to determine break-even points
• Evaluate break-even points
• Utilize break-even point assessment for decision making
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• Evaluate various accounting measures and their relevance to a wide range of
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• Employ managerial accounting approaches and information to make effective
decisions
• Demonstrate effective communication skills to present accounting information to
stakeholders
• Assess managerial accounting tools and their usefulness to organizational
leaders
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In order to analyze sunk, opportunity, and accounting costs, you must first understand
their meanings in the language of business. Sunk costs are costs that have been
incurred previously and present or future decisions will not change that fact (Weygandt,
Kimmel, & Kieso, 2010). They cannot be recovered. For example, a machine in your
department was repaired two months ago and it cost $750. You are currently trying to
decide which of two new machines you should buy to replace that machine. The $750 is
a sunk cost and should not affect your decision. Even though sunk costs cannot be
recovered and should not be considered in deciding between alternatives, they do have
value with respect to accountability. As you studied last week, managers should be held
accountable for past actions and expenditures.
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advertising, equipment purchases, etc.
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1. Our book mentions, An analyst could easily get lost in examini.docx
1. Our book mentions, “An analyst could easily get lost in examining ratios and lose track of financial management’s primary objective – the maximization of shareholders’ wealth. The manager and analyst must be concerned with how ratios can help to explain share price behavior. It’s important to know why the price is outperforming competing firms’ price or why the stock is underperforming its peers” (Byrd et al, 2013). The ticker symbol for the company I chose that starts with the first letter of my last name “Canales” is Coca Cola. Since I am comparing financial ratios, the other company from the same industry that I’m comparing it to is PepsiCo.
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Assets Turnover Ratio – This type of ration defines and overall effectiveness of an organization’s daily operations. Coca Cola’s ratio is at 5.78 and PepsiCo’s ratio is 8.87. Since Coca Cola is at a low ration this tells us that this company is not as effective as PepsiCo (possibly due to inefficient use of equipment or inventory loss, etc.). In contrast, PepsiCo shows an increase in assets turnover ratio although the company must pay attention to its net profit that is decreasing. As a result, PepsiCo must put a lot more emphasis in its weak areas to raise their net profit.
Angie
References
Byrd, J., Hickman, K., & McPherson, M. (2013). Managerial Finance. San Diego, CA: Bridgepoint
The Coca Cola Company. (2014). Form 10-K.Annual Report. Retrieved from http://assets.cocacolacompany.com/d2/78/7d7cad454f3fbd033d55d786b890/2014-annual-report-on-form-10-k.pdf
Pepsico. (2014). Pepsico 50 years & growing.PepsiCo 2014 Annual Report. Retrieved from http://www.pepsico.com/docs/album/default-document-library/pepsico-2014-annual-report_final.pdf?sfvrsn=0
2.
I have decided to pick Disney(Walt Disney Company) as my company. Its ticker symbol is DIS. Disney is not just a movie company anymore. It has become a huge media conglomerate. They own ESPN, ABC, Mirama ...
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CVS Health Corporation is a company that was founded in America that provides pharmacy health care services through two segments: Pharmacy Services and Retail Pharmacy. Its company slogan is “Health is everything.” The Pharmacy Services segment focuses on pharmacy benefit management services which serves employers, unions, insurance companies, as well as many others. It provides services such as prescription management services, clinical services, and plan design and administration. It is the second largest prescription management and pharmaceutical services business in the United States.
The other segment of CVS Health Corporation is its Retail Pharmacy, which includes its over 7,500 retail drugstores across the United States. It is the second largest pharmacy chain in the United States. The Retail Pharmacy segment sells prescription drugs, over-the-counter drugs, beauty products, convenience foods, greeting cards, as well as many other products and services. Along with its retail drugstores, this segment also has 860 health care clinics which are all located relatively closely to its retail drug stores.
As of May 30, 2015, the consensus forecast amongst 25 polled investment analysts covering CVS Health Corp advises that the company will outperform the market. This has been the consensus forecast since the sentiment of investment analysts improved on Apr 08, 2004. The previous consensus forecast advised investors to hold their position in CVS Health Corp. A 12 month price targets for CVS Health Corp was forecasted, with a median target of $115, a high estimate of $125 and a low estimate of $108. The median estimate represents a 15.06% increase from the last price of $99.95. Both dividends per share and earnings per share excluding extraordinary items growth increased 22.22% and 5.90%. The positive trend in dividend payments is noteworthy since very few companies in the Retail Drugs industry pay a dividend. With everything going in favor of CVS, they plans to grow and expand by buying Omnicare for $12.7 billion.
2. Beta and WACC
This company's capital structure relies on a level of debt that is comparable with the Food and Staples Retailing industry's norm, at 25.65%. Additionally, even though there are not enough liquid assets to satisfy current obligations, Operating Profits are more than adequate to service the debt. Accounts Receivable are typical for the industry, with 24.58 days worth of sales outstanding. Last, inventories seem to be well managed as the Inventory Processing Period is typical for the industry, at 36.04 days.
Beta:
Rationale for any adjustments How does your beta compare to Yahoo’s, Value Line’s? What might cause any difference?
WACC assumptions (basis): Capital structure
Interest rate on debt
Tax rate
Beta: 1.09
WACC = 13.50%
KE:14.87%
Beta equation, kE :
E(RCVS) = RF + βCVS [E(RM) – RF]
14.87%= 2.92% + 1.09 [13.84% – 2.92%]
= 14.87%
The abo.
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The document discusses how to value a pest control firm. It outlines several factors that contribute value, such as annual revenue, earnings, assets, and most importantly, the customer list. It also describes different valuation methods like adjusted book value, capitalized earnings, and discounted cash flow. The key points are that the customer list is usually the most valuable asset, and maintaining growth, retention, margins, and service quality can maximize a firm's value for potential buyers such as private equity firms.
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Week 6 Weekly Briefing
Welcome to Week 6! In Week 5, you studied standard costs and variances and their
relationship to decision making. You analyzed the results of the direct labor and direct
materials variances and discussed possible causes for the variances. All of these terms
were added to your accounting vocabulary.
In Week 6, you will continue to build your accounting vocabulary as you study sunk
costs, opportunity costs, accounting costs, and break-even analysis.
This week:
In terms of the specific Learning Objectives, you will:
• Analyze the impact on the organization of sunk costs, opportunity costs, and
accounting costs
• Determine the impact of cost decisions
• Apply appropriate accounting processes to determine break-even points
• Evaluate break-even points
• Utilize break-even point assessment for decision making
In terms of course-level Learning Outcomes, you will:
• Evaluate various accounting measures and their relevance to a wide range of
stakeholders
• Analyze various types of budgets, strategic planning, and forecasting
• Employ managerial accounting approaches and information to make effective
decisions
• Demonstrate effective communication skills to present accounting information to
stakeholders
• Assess managerial accounting tools and their usefulness to organizational
leaders
• Apply accounting principles ethically and appropriately to personal and
professional contexts
Sunk Costs, Opportunity Costs, and Accounting Costs
In order to analyze sunk, opportunity, and accounting costs, you must first understand
their meanings in the language of business. Sunk costs are costs that have been
incurred previously and present or future decisions will not change that fact (Weygandt,
Kimmel, & Kieso, 2010). They cannot be recovered. For example, a machine in your
department was repaired two months ago and it cost $750. You are currently trying to
decide which of two new machines you should buy to replace that machine. The $750 is
a sunk cost and should not affect your decision. Even though sunk costs cannot be
recovered and should not be considered in deciding between alternatives, they do have
value with respect to accountability. As you studied last week, managers should be held
accountable for past actions and expenditures.
Opportunity costs are the benefits forgone from choosing one alternative over another
(Zimmerman, 2014). If your department has a machine that is capable of making both
product A and product B, and it is being used to make product A, the benefit of making
product B is lost. Another example pertains to hiring an employee for $50,000. The
opportunity cost is that the money is no longer available for other opportunities such as
advertising, equipment purchases, etc.
Accounting costs are the actual historical costs incurred for a product or service and are
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This document discusses pricing decisions and strategies. It covers understanding price, factors that affect pricing like costs and competition, methods for setting prices, and adapting prices over time and locations. The key steps in setting a price include selecting objectives, determining demand and costs, analyzing competitors, choosing a pricing method, and selecting the final price. Common pricing methods are markup pricing, absorption cost pricing, target-return pricing, and perceived value pricing. Companies also consider geographical pricing, discounts, promotional pricing, and price changes over time in response to costs or competitors.
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2) The discounted cash flow valuation estimates the value per share at $29.03, while the relative valuations estimate a range of $27.86-$44.05 and find the company is overvalued.
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The document analyzes Intercontinental Exchange (ICE) stock using discounted cash flow (DCF) and relative valuation methods. The DCF analysis implies share prices of $69.09-81.24, above the current price. Relative valuations using industry price-to-earnings (P/E) ratios imply a price of $52.04-63.31. Considering both intrinsic and relative valuations, the analysis recommends buying ICE stock.
Intercontinental Exchange -- Investment Analysis Report
The document analyzes Intercontinental Exchange (ICE) stock using discounted cash flow (DCF) and relative valuation methods. The DCF analysis implies share prices of $69.09-81.24, above the current price. Relative valuations using industry price-to-earnings (P/E) ratios imply a price of $52.04-63.31. Considering both intrinsic and relative valuations, the analysis recommends buying ICE stock.
1. Our book mentions, An analyst could easily get lost in examini.docx
1. Our book mentions, “An analyst could easily get lost in examining ratios and lose track of financial management’s primary objective – the maximization of shareholders’ wealth. The manager and analyst must be concerned with how ratios can help to explain share price behavior. It’s important to know why the price is outperforming competing firms’ price or why the stock is underperforming its peers” (Byrd et al, 2013). The ticker symbol for the company I chose that starts with the first letter of my last name “Canales” is Coca Cola. Since I am comparing financial ratios, the other company from the same industry that I’m comparing it to is PepsiCo.
Current Ratio (CR) – Current ratio = current assets ÷ current liabilities. This type of ratio defines how effective the organization is with repaying their current debts from their current assets. Coca Cola’s CR is 1.090, whereas PepsiCo’s CR is 1.095; they are pretty much neck and neck and 1:1 is the reliable ratio but each of the organization’s liabilities must be managed.
Net Profit Margin Ratio – This type of ratio shows how effective a firm is to turn its profit from its revenue. In order to get more profit, the company has to have more sales. On the other hand, a low ratio denotes that its consumers are not happy with its products thus sales fall. This ratio is computed by: Net profit ÷ sales x 100. The net profit ratio for Coca Cola is 18.8% (The Coca Cola Company, 2014) and 9.4% for PepsiCo (PepsiCo, 2014). Both companies show net profits in the forefront of the industry but Coca Cola can turn its sales to profit more than PepsiCo. Although, the cause for the low net profit may be attributed to changes in their soda choice.
Assets Turnover Ratio – This type of ration defines and overall effectiveness of an organization’s daily operations. Coca Cola’s ratio is at 5.78 and PepsiCo’s ratio is 8.87. Since Coca Cola is at a low ration this tells us that this company is not as effective as PepsiCo (possibly due to inefficient use of equipment or inventory loss, etc.). In contrast, PepsiCo shows an increase in assets turnover ratio although the company must pay attention to its net profit that is decreasing. As a result, PepsiCo must put a lot more emphasis in its weak areas to raise their net profit.
Angie
References
Byrd, J., Hickman, K., & McPherson, M. (2013). Managerial Finance. San Diego, CA: Bridgepoint
The Coca Cola Company. (2014). Form 10-K.Annual Report. Retrieved from http://assets.cocacolacompany.com/d2/78/7d7cad454f3fbd033d55d786b890/2014-annual-report-on-form-10-k.pdf
Pepsico. (2014). Pepsico 50 years & growing.PepsiCo 2014 Annual Report. Retrieved from http://www.pepsico.com/docs/album/default-document-library/pepsico-2014-annual-report_final.pdf?sfvrsn=0
2.
I have decided to pick Disney(Walt Disney Company) as my company. Its ticker symbol is DIS. Disney is not just a movie company anymore. It has become a huge media conglomerate. They own ESPN, ABC, Mirama ...
Data Driven Decision Making
Research shows that the most successful companies use benchmarking as a key management process and information tool. As your company develops its annual strategic plans and budget, it helps to understand where you stand relative to your peers and competitors. Deviating from benchmarks isn’t good or bad: But it is important to know why and by how much you deviate in order to test and justify your decisions.
OPEXEngine Founder and CEO Lauren Kelley delivered this “Data-Driven Decision Making” presentation to an audience of over 100 CFOs at an invitation-only event hosted by General Catalyst Partners, a Boston-based venture firm on 19-Oct-2011.
Ratioanalysis
Relative valuation involves comparing the value of an asset to similar assets in the market. To do relative valuation, one must identify comparable assets and obtain their market values in order to calculate standardized price multiples that control for differences between firms. Relative valuation reflects market perceptions and is useful when the objective is to value a security based on current market price, such as for an IPO, or when using momentum-based strategies. However, relative valuation also means that some securities will always appear under or overvalued. It generally requires less information than discounted cash flow valuation.
Walter And Gordan theories
A dividend is a payment made by a corporation to its shareholders, usually as a distribution of profits. Dividends are important for more than income generation: they also provide a way for investors to assess a company as an investment prospect. Dividend and market price of shares are interrelated. However, there are two schools of thought: while one school of thought opines that dividend has an impact on the value of the firm, another school argues that the amount of dividend paid has no effect on the valuation of firm.
The first school of thought refers to the Relevance of dividend while the other one relates to the Irrelevance of dividend.
Relevance includes: 1. Walter Valuation Model 2.GORDON’S MODEL.
MBA - 621 Final Exam.docx
Coca-Cola is a global beverage company that offers over 5,000 brands in more than 200 countries. In 2013, Coca-Cola issued common stock but did not issue any convertible bonds or warrants. The document discusses various financial formulas used to determine stock and bond pricing, including the weighted average cost of capital and capital asset pricing model. It provides an example calculation of determining the price of newly issued Coca-Cola stock.
Coca Cola Financial Review
Coca-Cola is a global beverage company that offers over 5,000 brands in more than 200 countries. In 2013, Coca-Cola had annual revenues of $46 billion. The document discusses Coca-Cola's financial performance in 2013, including their issuance of common stock and valuation of bonds and stock prices. Formulas are provided to calculate the present value of bonds based on interest rates, as well as determining stock prices based on average prices and desired rate of return.
Admission of a partner average profit method in valuation of non-purchased ...
In this method, primarily average profit is computed on the basis of the
previous few years’ profits. At the time of computing average profit
preventative measure must be taken with regards to any abnormal items of
profit or loss which may affect profit in the mere prospect. It must be denoted
that average profit may be based on either weighted average or simple
average.
Salary survey c level-2021
Welcome to the 2021 Indigo’s C-Level Salary Guide. successful salary planning requires a thorough understanding of factors that influence the amount required to secure the appropriate talent.
The market for talent in the tech field is tighter than others, heightening the importance of proper compensation.
CFA IRC Team E
Apple Hospitality REIT is recommended as a Buy with a target price of $20.06. Key points include:
- Apple maintains low leverage and debt levels compared to peers, funding future acquisitions through its credit facility.
- The portfolio of 179 hotels across 32 states provides geographic diversification and consistent performance across diverse demand drivers.
- Demand is expected to continue outpacing new hotel room supply through 2017. Apple focuses on upscale select service hotels where new room growth will be strong.
- Valuation analyses including DCF, NAV, and peer comparisons estimate Apple's fair value at $20.52, supported by a monthly dividend yield of 6.56%, balance sheet capacity
Stock Valuation CVS Health Corporation (CVS)CVS Health Corpor.docx
Stock Valuation: CVS Health Corporation (CVS)
CVS Health Corporation is a company that was founded in America that provides pharmacy health care services through two segments: Pharmacy Services and Retail Pharmacy. Its company slogan is “Health is everything.” The Pharmacy Services segment focuses on pharmacy benefit management services which serves employers, unions, insurance companies, as well as many others. It provides services such as prescription management services, clinical services, and plan design and administration. It is the second largest prescription management and pharmaceutical services business in the United States.
The other segment of CVS Health Corporation is its Retail Pharmacy, which includes its over 7,500 retail drugstores across the United States. It is the second largest pharmacy chain in the United States. The Retail Pharmacy segment sells prescription drugs, over-the-counter drugs, beauty products, convenience foods, greeting cards, as well as many other products and services. Along with its retail drugstores, this segment also has 860 health care clinics which are all located relatively closely to its retail drug stores.
As of May 30, 2015, the consensus forecast amongst 25 polled investment analysts covering CVS Health Corp advises that the company will outperform the market. This has been the consensus forecast since the sentiment of investment analysts improved on Apr 08, 2004. The previous consensus forecast advised investors to hold their position in CVS Health Corp. A 12 month price targets for CVS Health Corp was forecasted, with a median target of $115, a high estimate of $125 and a low estimate of $108. The median estimate represents a 15.06% increase from the last price of $99.95. Both dividends per share and earnings per share excluding extraordinary items growth increased 22.22% and 5.90%. The positive trend in dividend payments is noteworthy since very few companies in the Retail Drugs industry pay a dividend. With everything going in favor of CVS, they plans to grow and expand by buying Omnicare for $12.7 billion.
2. Beta and WACC
This company's capital structure relies on a level of debt that is comparable with the Food and Staples Retailing industry's norm, at 25.65%. Additionally, even though there are not enough liquid assets to satisfy current obligations, Operating Profits are more than adequate to service the debt. Accounts Receivable are typical for the industry, with 24.58 days worth of sales outstanding. Last, inventories seem to be well managed as the Inventory Processing Period is typical for the industry, at 36.04 days.
Beta:
Rationale for any adjustments How does your beta compare to Yahoo’s, Value Line’s? What might cause any difference?
WACC assumptions (basis): Capital structure
Interest rate on debt
Tax rate
Beta: 1.09
WACC = 13.50%
KE:14.87%
Beta equation, kE :
E(RCVS) = RF + βCVS [E(RM) – RF]
14.87%= 2.92% + 1.09 [13.84% – 2.92%]
= 14.87%
The abo.
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Market multiple model
- 1. Market Multiple Model We used the Market Multiple Model to analyze McDonald’s with its peer company growth rate, volatility, and return on equity (ROE). As a result of the analysis, we made a judgment as to whether McDonald’s is average, better or worse than it’s peers. We then estimated the expected Price/Earnings (P/E) and Price/Cash Flow ratios of McDonald’s, given the relationship between its ratios and those of its peers. This valuation model is commonly used, but does not provide the same level of information as the other two models. Both the dividend discount model and the discounted cash flow model look at the present value of future cash flows. We use this model simply looks at how a few of McDonald’s ratios compare to those of its peers, and set a valuation of the company accordingly. Price/Earning Multiples Price/Earnings are the most useful and widely used of all valuation multiples. Before we analyze the P/E ratio of McDonald’s, we compare its growth, beta and profitability with its peer companies. The Future Growth rate of McDonald’s is 11.50%, the Beta is 0.90, and the ROE is 20.20%. This data represents McDonald’s as an average company (no better nor worse than its peer companies, Wendy’s and Tricon). However, McDonald’s current P/E is 22.35, which is much higher than its peers are. Although McDonald’s P/E ratio is still lower than the S&P 500 median P/E ratio of 29.00, we decided to adjust its P/E to an average ratio. We made this adjustment because we feel that the market will consider paying a higher P/E to a company only when it has a higher growth rate, a better past performance, a higher expected future growth, a lower risk, and a higher profitability. Since all these situations do not seem to exist in McDonald’s, we needed to adjust its P/E ratio to an average ratio of 14.71. When we use the average P/E ratio times the earnings in 1999; we calculate price per share of $20.44, which is
- 2. much lower than the recent trading price of $30.88. Therefore, according to the Price/Earning Multiples, our opinion is that the current trading price of MCD is too high. Price/Cash Flow Multiples From the above Price/Earning Multiples, we have already explained that McDonald’s position of Future Growth, Risk (Beta), and Profitability (ROE) is only average in comparison to its peers. However, McDonald’s has a much higher P/CF ratio compared to its peers, 14.91. According to the Market Multiples principle, we feel McDonald’s high P/CF ratio is not justified. Therefore, we adjusted McDonald’s P/CF ratio to an average of 10.03. We use this average P/CF ratio times the Cash flow per share in 1999. The price per share we calculate is $21.57, which is much lower than the recent trading price of $30.88. Therefore, based on the Price/Cash Flow Multiples, we concluded the current trading price of McDonald’s is overpriced. In addition to the above two Multiples, we can use a more direct method to verify if McDonald’s recent trading price is too high. As in normal practice, when making a decision to buy a business, many potential buyers or investors would multiply the company current year revenue by 2 to determine a reasonable trading price. If the business of the company is considered very attractive, they would use multiple of 3. When we use McDonald’s 1999 revenue per share, $9.82 times 2, we get an amount of $19.64, which is much lower than the recent trading price of $30.88. Only when we use a multiple of 3, do we get an amount of $29.46, which is closer to the recent trading price of $30.88. However, based on the Multiples above, we feel that McDonald’s is an average company, it seems that it does not justify paying three times of its yearly revenue to buy its stock.