Valuation Project Report

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Valuation project report

Valuation of the Incentive Stock Options for
Procter & Gamble Co.

Name: Haining Jiang

Company background:

In this valuation project, I will analyze a company which is mature and I am interested in. The name of the company is Procter & Gamble Co. the Procter & Gamble Company, together with its subsidiaries, engages in the manufacture and sale of a range of branded consumer packaged goods. The company operates in five segments: Beauty, Grooming, Health Care, Fabric Care and Home Care, and Baby Care and Family Care. In the year of 1837, William Procter and James Gamble settled in the Queen City of the West, Cincinnati, and established themselves in business. As a result, a new company was born: Procter & Gamble. Procter & Gamble became into a listed company at a stock price and dividend which are $ 1.7 and $ 0.01 per month respectively in 19 Jan. 1970. For many years, P & G keep following their purpose and social responsibility at every and every corner in the world: “We will provide branded products and services of superior quality and value that improve the lives of the world’s consumers, now and for generations to come. As a result, consumers will reward us with leadership sales, profit and value creation, allowing our people, our shareholders and the communities in which we live and work to prosper.” Until now, P & G has become the largest consumer packaged goods company in the world at $ 67.17 of the share price and $ 0.562 of dividend per month.

Main contents:

1. Discounted dividend valuation
The most basic model is the Gordon Growth Model, which prices the stock by the dividend and future growth of dividends. The formula would be like this: V0=D0 (1+g)(r-g)=D1r-g
Where D0 is today’s dividend, which would be $ 2.21 in our case. r is the cost of capital, r will be calculated like: Assume :
The market premium = 6%*
The risk-free rate = 3%*
Given number in the case:
β = 0.27
So,
r = 0.03 + 0.27 x 0.06 = 4.62%
The best way to estimate g is:
The term g can be viewed as the return on owner’s equity times the earnings retention rate b. b = (1 – dividend payout ratio) = 1 – 58% = 42%
return on equity = 14.05%
So,
Sustainable growth rate = gs = 42% x 14.05% = 5.901%
r< g, so we may meet a big problem when using the V0 formula above. But, as far as we all know, it is not possible that the firm can grow faster than r forever. The high return will attract other investors into the market to compete and the firm’s rate will eventually fall. And, I determine the long-run growth rate of dividends, gL = 3%*. g < r. Even if this data is not real in the true P&G case, I think it’s will be fine to continue our model. V0=D0 (1+g)(r-g)= $ 2.21x(1+0.03)(0.0462-0.03)=$ 140.51

1) Two-stage dividend growth
When the P & G is growing faster than r, one can use a multistage model, where the growth stages are broken into two parts. The first is the supernormal growth phase call gs , which is the rate that is higher than r. So we can assume:

at the first period ( r < g ):
gS = 5.901% (as we calculated above)
n = 3*;
At the second period ( r > g ):
r = 4.62% (as we calculated above)
gL = 3% (as we calculated above)
D0 = $ 2.21 (real data from P&G) ;
As we all know the formula is:
V0 = t=1n[ Dt1+rt+ Vn(1+r)n]
Vn= D01+ gsn(1+ gL)(r- gL)
So,
V3= 2.21x1+ 0.0593(1+ 0.03)(0.0462- 0.03) = $ 166.88
V0 = 2.21x(1+0.059)1(1+0.0462)1+ 2.21x(1+0.059)2(1+0.0462)2+ 2.21x(1+0.059)3(1+0.0462)3+ 166.88(1+0.0462)3 = $ 152.527

2) Three-stage dividend growth
We assume the P & G company experienced a life-cycle with a three stages that are: an early, development stage with high growth, a maturing phase with moderate growth, and a declining phase with little, no, or negative growth. The current dividend of $ 2.21 per share will not change....
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