Question

Given that Dr. Bueller wants to make stocks a major part of his investment portfolio, you decide to focus on how to analyze stocks. You decide to use a large U.S. industrial company, to demonstrate how to analyze stocks. The research department has provided you with the following information regarding this company. This year (2009), free cash flow is expected to reach $325 million. In 2010, it is expected to reach $350 million. 2011, $400 million. 2012, $425 million And 2013, $450 million. The analyst has projected an intrinsic value for this stock of $65.00. Dr. Bueller is busy this week, so he asks you to send him an e-mail. Compose an e-mail that in addition to explaining the following information for the industrial company, which is a publicly traded company that trades on the NYSE, addresses the efficient market hypothesis, and how the analyst responsible for monitoring this stock has projected this intrinsic value for the company's stock. 52-week range: Hi 75 Lo 35 Current stock price: 50 Dividend Yield: 2.75% Dividend per share: 1.375 P/E ratio: 20 Earnings per share: $2.50 Shares outstanding: 100 million Market capitalization: $5 billion Cost of capital: 9% Growth rate of free-cash-flows beyond 2013: 3% Assignment Guidelines Using the textbook, course materials, and Web resources, find the definitions for the ten values listed above in the Assignment Description. In your own words, rewrite the definition for each of the ten values. Demonstrate how to calculate the values using the information from the company's stock as an example.

Answer 1

1. Cash flow - It refers to he net value of inflows and outflows of cash and cash equivalents in the company. A positive figure is indicative of an excess of inflows over outflows while a negative figure denotes an excess of outflows over inflows.
2. Intrinsic Value - This is the value of the stock calculated by analysts of a unit of the stock deriving the value using company fundamentals without any reference to the market price of the stock.
3. Efficient market hypothesis - This is an assumption that the share price of a company is a rational value derived after comparative analysis of all information available and all assets of the company.
4. Current stock price - This is the current price of the share in the market.
5. Dividend yield - Dividend yield refers to the dividend earned by the company in the fiscal year as a proportion of the company's stock price.
6. Dividend per share - This refers to the dividend earned by the company in the fiscal year.
7. P/E ratio - Price to earnings ratio. This ratio shows the price of the company as a ratio of the earnings of the company in the fiscal year. Here earnings refer to both the dividend earned by the company and the increase in the stock price in the year.
8. Earnings per share - This is the monetary gain per stock in the fiscal year.
9. Market Capitalization - It is the current market price of a share multiplied by the number of outstanding shares of the company. It is commonly known as market cap.
10. Cost of capital - It is the cost of acquiring capital for the company. It is calculated using both the cost of equity and the cost of debt of the company.