80.2K

Verified Solution

Link Copied!

Great news! Thanks to the efforts of Professor Maria Martinez-Sanabria, The Value Line is now available online from Southwesterns library. Thank you, Professor Martinez-Sanabria! You can also visit a local library that has The Value Line and scan through the thousands of pages of stock research. Perform the following valuation model calculations:

1. Using previous 5 years of dividend growth, use Gordon Growth Discount Model to predict the present values at:

a. 12% required rate of return (Reminder: This model will not work if the dividend growth rate is greater

b. 10% required rate of return than the required rate of return. You may need to try higher required rates of

c. 8% required rate of return return. Or you may just report N/A as the models result.)

2. Using 3 to 5 years of expected results, use the Discounted Cash Flow Model to predict the present values at:

a. 10% required rate of return

b. 8% required rate of return (Dont forget the spreadsheets. They make the calculations much easier.)

Notes: Use the current and prior years dividends per share to calculate the dividend growth rate for the Gordon Growth Dividend Discount Model. The dividend growth rate for each year is computed by the following formula:

(Next Years Dividends - Last Years Dividends) / (Last Years Dividends)

You then compute the average of the growth rates that you calculated by summing all the growth rates together and dividing by the number of years. Go back at least five years. (Of course, you could simply use The Value Lines projected annual dividend growth rate, but that is not as much fun, is it?)

Remember that sometimes this model will produce aberrant results (such as division by zero or negative values) depending upon the required rate of return. If this happens, you can adjust the required rate of return up or down until you get reasonable values. Or you could simply display N/A as the result.

For the Discounted Cash Flow Model, use The Value Line estimated or actual dividends and extrapolate the estimated dividends from 2023 to 2025, 2026, or 2027. Or use the dividend growth rate you calculated for the Gordon Growth Dividend Discount Model to calculate estimates of the 2024 through 2027 dividends. Use an appropriate value for the target price of late 2025, or anytime in 2026 or 2027. (You can use your own prediction or look at The Value Line target price range or choose a price somewhere in the middle. How is that for accuracy? Remember that we want to eliminate any pretense of absolute precision. We are predicting the weather! Do not put any credence in your results. We are simply tilting the odds in our favor, in my humble opinion.)

Dow Jones Stocks: The models work best with large-cap stocks with long histories of paying dividends. (aka blue-chip stocks)

American Express, Amgen, Apple, Boeing, Caterpillar, Chevron, Cisco Systems, Coca Cola, Disney, Dow Chemical, Goldman Sachs, Home Depot, Honeywell, IBM, Intel, Johnson & Johnson, J. P. Morgan, McDonalds, Merck, Microsoft, Nike, Procter & Gamble, salesforce, 3M, Travelers, United Healthcare, Verizon, Visa, Walgreens Boots, Walmart

Other stocks to study:

Abbott Laboratories, Abbvie, Aetna, AFLAC, Air Products and Chemicals, Anheuser-Busch InBev, Aon, AT&T, Automatic Data Processing, Baker Hughes, Ball Corporation, Bank of America, Bank of New York, Best Buy, BlackRock, The Blackstone Group, Bristol-Myers Squibb, Cardinal Health, Citigroup, CSX, CVS/Caremark, Corning, Deere, Dominion Energy, Dr. Pepper, Dupont, Emerson Electric, ExxonMobil, FedEx, Fifth Third Bancorp, Ford, Gannett, General Dynamics, General Electric, General Mills, General Motors, Halliburton, Harley-Davidson, Hersheys, Illinois Tool Works, Ingersoll-Rand, International Flavors and Fragrances, J. M. Smucker, Johnson and Johnson, Johnson Controls, Kelloggs, Kimberly-Clark, Kraft-Heinz, Eli Lilly, Lockheed-Martin, Lowes, Marathon Oil, Marsh & McLennan, Mastercard, Medtronic, Mondelez, Newmont Mining, Norfolk Southern, Northrop Grumman, Oracle, PepsiCo, Pfizer, Pitney-Bowes, PPG Industries, Public Storage, Raytheon, Schlumberger, Sherwin-Williams, Snap-on, Southern Co, State Street Corp, Sysco, Target, Texas Instruments, TJX (TJ Maxx), Tyson, Union Pacific, United Technologies, UPS, USB, Wells Fargo, Xcel Energy, Yum Brands

Heres an idea: Choose two competitors such as Visa/Mastercard, FedEx/UPS, or Home Depot/Lowes. Have fun!

P.S. If you go to a library to work on The Value Line, flip through The Value Line index and gawk at the sheer number of publicly traded companies. There are thousands! Could any one person ever become qualified to give advice on more than a small percentage of the companies available? We humbly hope that you become addicted to researching companies using these and other techniques you learn along the way. Be Awesome!

Answer & Explanation Solved by verified expert

See Answer