As a new junior analyst for a brokerage firm, you are excited todemonstrate the skills you learned in college and prove that youare worth your attractive salary. Your first assignment is toanalyze Johnson& Johnson stock. Your boss recommendsdetermining prices based on both the discounted free cash flowvaluation method and the comparable P/E ratio method. You arereally hoping the two methods will reach similar prices. Goodluck!

1. Go to Reuters (https://www.reuters.com) and enter the symbolfor Johnson& Johnson (JNJ) in the “Search” Box, then selectJohnson and Johnson. From the main page for JNJ, gather thefollowing information, and enter it into a spreadsheet:

1. Current stock price
2. The EPS
3. The number of shares of stock outstanding
4. The industry P/E ratio

2. Click the “Analysts” tab. On the Analyst page, scroll down tofind the LT (Long-term) Growth Rate and enter the Mean value intoyour spreadsheet.

3. Go to Morningstar (www.morningstar.com) and enter “JNJ” intothe “Quote” box.

4. Under “Financials” Click Income Statement. Copy and paste (oruse the Export to Excel button to create a new file with the data)the most recent three years’ worth of income statements into a newworksheet in your existing Excel file. Repeat this process for boththe balance sheet and the cash flow statement for Johnson andJohnson. Keep all of the different statements in the same Excelworksheet. Note: Make sure you are collecting annual data.

5. To determine the stock value based on the discounted free cashflow method:

1. Forecast the free cash flows. Start by using the historicaldata from the financial statements downloaded from Morningstar tocompute the three-year average of the following ratios:

1. EBIT/sales
2. Tax rate = income tax expenses/income before tax
3. Property plant and equipment /sales
4. Depreciation/ property plant and equipment
5. Net working capital/sales

2. Create an empty timeline for the next five years
3. Forecast future sales based on the most recent year’s totalrevenue growing at the LT growth rate from Reuters for the firstfive years
4. Use the average ratios computed in part (a) to forecast EBIT,property, plant and equipment, depreciation, and net workingcapital for the next five years.
5. Forecast the free cash flow for the next five years.
6. Determine the terminal enterprise value for year 5. Long-rungrowth rate is 4% and a cost of capital for JNJ is 11%.
7. Determine the enterprise value of the firm as the present valueof the free cash flows.
8. Estimate “Debt” (take the average of the past five years ofdebt)
1. Estimate “Cash” (take the average of the past fiveyears of cash)
10. Determine the stock price = (Enterprise value – Debt+ Cash)/number of shares outstanding.

6. To calculate an estimate of JNJ price based on a comparable P/Eratio, multiply the industry average P/E ratio by JNJ EPS.

7. Compare the stock prices produced by the two methods to theactual stock price. What recommendations can you make as to whetherclients should buy or sell JNJ stock based on your priceestimates?