As a new analyst for a large brokerage firm, you are anxious to demonstrate your skills you learned in your undergraduate degree to prove you are worth your attractive salary. Your first assignment is to analyze the stock of CK Asset Holdings Limited, a real estate company based in Hong Kong.

Your immediate superior recommends determining prices based on both the dividend-discount model and discounted free cash flow valuation method. CK Asset Holdings Limited uses a cost of equity of 10.8% and an after-tax weighted average cost of capital of 7.8%. The expected return on new investments is 12.4%. However, you are a little concerned because your finance professor had indicated that using both methods can result in widely differing estimates when applied to real data. You are really hoping that the two methods will results in similar prices. Good luck with that!

1. Go to Yahoo! Finance (https://finance.yahoo.com/) and enter the stock code for CK Asset Holdings Limited (1113.HK). From the main page for CK Asset Holdings Limited, gather the following information and enter it onto a spreadsheet.

a. The current stock price (last trade) at the top of the page.

b. The forward dividend amount, found on the bottom right of the stock quote table.

2. Next, click “Statistics” on the left side of the page. From the Statistics page, find the total number of shares outstanding.
3. Next, click “Analysis” from the right side of the tab. From the Analysis page, find the expected growth rate for the next five years and enter it onto your spreadsheet. It will be near the very bottom of the page.
4. Next, click the “Financials” tab. Copy and paste the entire three years of income statements onto a new worksheet in your existing Excel file. (Note: if you are using IE as your browser, you can place your cursor in the middle of the statement, right click, and select “Export to Microsoft Excel” to download an Excel version.) Repeat this process for both the balance sheet and cash flow statement for CK Asset Holdings Limited. Keep all different statements in the same Excel worksheet.
5. Finally, go to Morningstar (www.morningstar.com) and enter CK Asset Holdings. From the main page, click on “Key Ratios” tab and then click the “Full Key Ratios Data” tab and calculate the average payout ratio for the prior two years.
6. To determine the stock value based on the dividend-discount model:

a. Create a timeline in Excel for five years.

b. Use the dividend obtained in Yahoo! Finance as the current dividend to forecast the next five annual dividends based on the five-year growth rate.

c. Determine the long-term growth rate based on CK Asset Holdings payout ratio (which is one minus the retention ratio) using Eq. 9.12.

d. Use the long-term growth rate to determine the stock price for year five using Eq. 9.13.

e. Determine the current stock price using Eq. 9.14.
7. To determine the stock value based on the discounted free cash flow method:

a. Forecast the free cash flows using the historic data from the financial statements downloaded from Yahoo! Finance to compute the three-year average of the following ratios:
i. EBIT/Sales ii. Tax Rate (Income Tax Expense/Income Before Tax iii. Property, Plant, and Equipment/Sales iv. Depreciation/Property, Plant, and Equipment v. Net Working Capital/Sales

b. Create a timeline for the next seven years.

c. Forecast future sales based on the most recent year’s total revenue growing at the five-year growth rate from Yahoo! for the first five years and the long-term growth rate for years 6 and 7.

d. Use the average ratios computed in part

(a) to forecast EBIT, property, plant, and equipment, depreciation, and net working capital for the next seven years.

e. Forecast the free cash flow for the next seven years using Eq. 9.18.

f. Determine the horizon enterprise value for year 4 using Eq. 9.24.
g. Determine the stock price using Eq. 9.22.
8. Compare the stock prices from the two methods to the actual stock price. What recommendations can you make as to whether clients should buy or sell CK Asset Holdings stock based on your price estimates?
9. Explain to your boss why the estimates from the two valuation methods differ. Specifically, address the assumptions implicit in the models themselves as well as those you made in preparing your analysis. Why do these estimates differ from the actual stock price of CK Asset Holdings?