Stocks and their valuation

Topics: P/E ratio, PEG ratio, Dividend yield Pages: 3 (608 words) Published: August 8, 2014

Intrinsic Stock Valuation - Emerson Electric

Intrinsic Stock Valuation - Emerson Electric
In this cyber-problem, you will value the stock for Emerson Electric, a scientific and technical instrument company. While stock valuation is obviously important to investors, it is also vital to companies engaging in a merger or acquisition. Here, the process of stock valuation can often be quite subjective. Frequently, the opposing sides of a merger or acquisition will have vastly different opinions of a firm's value. For example, in 1994, part of AT&T's purchase of Mc Caw Cellular called for AT&T to acquire Mc Caw's 52 percent stake in LIN Broadcasting and purchase the remaining 48 percent at its fair value. LIN'S advisors valued the stock at $162 a share, while AT&T estimated its value at $100 a share. The difference resulted in a whopping $1.6 billion. As this example demonstrates, stock valuation seems to be both art and science. In this cyber-problem, use the dividend growth model's constant growth assumptions to value Emerson's stock. In addition, you will apply the concepts of risk and return by estimating the stock's required return from the CAPM model. In order to arrive at a value for Emerson Electric, you will gather and use information from Yahoo!Finance (http://finance.yahoo.com). a.First, you need to determine an estimate of Emerson’s cost of equity. Begin by using the 10-year Treasury bond rate (http://finance.yahoo.com) as a proxy for the risk-free rate, rRF. For the market risk premium, rM - rRF, just assume a premium of 6.0%. 3.98 + (6%) + beta = 1094

b.Find an estimate of Emerson Electric's beta using Yahoo! Finance (use the stock symbol lookup function if necessary). The beta estimate is found on the “Key Statistics” page. Beta = 1.2

c.From data gathered in parts a and b use the CAPM model to determine Emerson's required return. Required rate of return: beta = 1.2, rRF = 7%, and RPM = 5%. Use the SML to calculate rs:...
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