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For each of the following scenarios, recalculate the intrinsic value of Chevron using the three-stage growth model of Spreadsheet 13.1(included with the question). Treat each
For each of the following scenarios, recalculate the intrinsic value of Chevron using the three-stage growth model of Spreadsheet 13.1(included with the question). Treat each scenario independently. (LO 13-2)
a. The terminal growth rate will be 3%.
b. Chevron's actual beta is 1.3.
c. The market risk premium is 7%.
2019 | 2020 | 2021 | 2022 | 2023 | | ||||||||||
A. Input data | |||||||||||||||
P/E | 14.90 | 14.93 | 14.95 | 14.98 | 15.00 | ||||||||||
Cap spending/share | 8.00 | 8.50 | 9.33 | 10.17 | 11.00 | ||||||||||
LT Debt ($M) | 25,000 | 26,000 | 27,333 | 28,667 | 30,000 | ||||||||||
Shares (million) | 1,890 | 1,880 | 1,870 | 1,860 | 1,850 | ||||||||||
EPS | 6.90 | 7.60 | 8.23 | 8.87 | 9.50 | ||||||||||
Working Capital | 4,000 | 3,000 | 3,667 | 4,333 | 5,000 | ||||||||||
B. Cash flow calculations | |||||||||||||||
Profits ($M, after tax) | 13,050 | 14,325 | 15,417 | 16,508 | 17,600 | ||||||||||
Interest ($M, after tax) | 691 | 719 | 756 | 793 | 830 | = (1-tax_rate) x r_debt x LT Debt | |||||||||
Chg Working Cap ($M) | -1,000 | 667 | 667 | 667 | |||||||||||
Depreciation ($M) | 17,100 | 18,000 | 19,333 | 20,667 | 22,000 | ||||||||||
Cap Spending ($M) | 15,980 | 17,437 | 18,893 | 20,350 | |||||||||||
Terminal value | |||||||||||||||
FCFF ($M) | 18,064 | 17,402 | 18,408 | 19,413 | 305,615 | * Formulas > name manager | |||||||||
FCFE ($M) | 18,345 | 17,980 | 18,948 | 19,917 | 273,692 | assumes fixed debt ratio after 2023 | |||||||||
FCFF is discounted at the equity rate | |||||||||||||||
C. Discount rate calculations | |||||||||||||||
Current beta | 1.2 | from Value Line | |||||||||||||
Unlevered beta | 1.089 | current beta /[1 + (1-tax)*debt/equity)] | |||||||||||||
terminal growth | 0.04 | ||||||||||||||
tax_rate | 0.21 | ||||||||||||||
r_debt | 0.035 | YTM on LT debt | |||||||||||||
risk-free rate | 0.02 | ||||||||||||||
market risk prem | 0.08 | ||||||||||||||
MV equity | 194,445 | 264,000 | Row 3 x Row 11 | ||||||||||||
Debt/Value | 0.1139 | 0.1110 | 0.1080 | 0.1050 | 0.1020 | linear trend from initial to final value | |||||||||
Levered beta | 1.2000 | 1.1968 | 1.1935 | 1.1903 | 1.1871 | unlevered beta x [1 + (1-tax)*debt/equity] | |||||||||
k_equity (cost of equity) | 0.1160 | 0.1157 | 0.1155 | 0.1152 | 0.1150 | 0.1150 | from CAPM and levered beta | ||||||||
WACC | 0.1059 | 0.1060 | 0.1060 | 0.1060 | 0.1061 | 0.1061 | (1-t)*r_debt*D/V + k_equity*(1-D/V) | ||||||||
PV factor for FCFF | 1.0000 | 0.9042 | 0.8175 | 0.7392 | 0.6683 | 0.6683 | Discount each year at WACC | ||||||||
PV factor for FCFE | 1.0000 | 0.8963 | 0.8035 | 0.7205 | 0.6462 | 0.6462 | Discount each year at k_equity | ||||||||
D. Present values | Intrinsic val | Equity val | Intrin/share | ||||||||||||
PV(FCFF) | 16,333 | 14,227 | 13,606 | 12,973 | 204,236 | 261,375 | 236,375 | 125.07 | |||||||
PV(FCFE) | 16,442 | 14,447 | 13,652 | 12,870 | 176,852 | 234,262 | 234,262 | 123.95 |
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