Enron’s stock price traded around $62.72 per share at the end of April 2001. Do you think Enron was worth that much? Why or why not?,
In order value stocks one has to understand the possible future earnings of the company represented as earning per share. Since Enron has not quality financial representations, those figures are not easy to identify. Relying on big financial intuitions’ data we may come up with a stock value which would be a conservative one and compare it with the actual stock value of $62.72 per share.
For calculating stock value one has to find out all possible future earnings of the company. As the second step all the future earnings should be discounted to now and finite sum will lead us the maximum amount for an investor that may want to pay for the company.
First we have to determine the expected rate of return. From the case for a BBA rated debt 8.37% return is understandable. And 5% risk premium is adequate for the company as case indicates. Although this turned out to be unrealistic value for Enron, we rely on the figure to calculate the value of the stock with the available knowledge as of the event date. Consequently 13.37% (8.37+5) rate of return will be used.
Growth rates are deducted from the institutions expected stock price data. We chose SalomonSmithBarney data that says 1.47->1,8->2.05 EPS values that corresponds to %22 and %13 growth for consequtive years. Our terminal growth rate is chosen as %5 percent for the rest of the life cycle of the company. Although %5 percent constant growth after 3rd year is not very realistic we will see its effect on the stock price soundness.
Year| Present Value of Earnings|
1| E1(1 + G1)/(1 + R)|
2| E2(1 + G2)2/(1 + R)2|
3 and forward| E3 / [(R – G3) * (1 + R)3 ]|
E1=1,47 , E2=1,8 , E3=2,05
G1 = %22, G2 = %13, G3 = %5
R = 13,37%
Thereafter, stock price turned out to be 50,7$. Actually...