Here are the companies to use for the writing assignments:

3M (MMM)

Nike (NKE)

The Coca-Cola Company (KO)

Dillard's Inc. (DDS)

Principles of Finance! | FINA301-Q2WW-S17 Financial Analysis Exercise III Start Date: Mon, Jun 26 Due Date: Sun, Jul 9 Points Points available: 70 Not yet graded. Assignment 7-2: Financial Analysis Exercise III 70 points Purpose The purpose of this assignment is to apply stock valuation techniques to real financial data utilizing an online database. L 3 Traits Overview Throughout this course you will work with the Yahoo!Finance database and perform elements of securities analysis involving a select group of companies. Action Items 1. Review the Sherwin-WIlliams example. 2. Select ONE of the four companies provided by your professor for analysis. 3. Write a 1-2 page (approximately 500 words) paper on the following: Part A-Fundamental Valuation: a. Estimate a growth rate for your firm's Dividends per Share. b. Assume a 12.5% discount rate. c. Calculate an estimated value of a share of the stock using the constant-growth model (Eq. 8-6 in the textbook), also known as the Gordon growth model. d. Compare and contrast your valuation results with the current share price in the market. e. Respond to this question: What changes in the variables would be necessary in your valuation to best approximate the market valuation? Part B - Relative Valuation: a. Estimate a growth rate for your firm's Earnings per Share (EPS). b. Determine an applicable Price-Earnings (P/E) ratio for your firm in 5 years. c. Calculate an estimated value of a share of the stock in 5 years using the P/E ratio model (Eq. 8-10 in the textbook). d. Respond to this question: Would you characterize your stock as undervalued or overvalued? Explain. e. Respond to this question: Based on your valuations in parts A and B, would you invest in this stock? Explain. 4. Submit your paper to www.turnitin.com and make any necessary changes to the paper as a result of this submission. Submission Instructions page 1 of 2 - 06/15/2017 Submit your final paper to www.turnitin.com. Click the Submit button to upload your completed assignment by Sunday of this week. Click the Meet button to join the online class meeting scheduled by your professor. Actively participate in class discussions. Grading Criteria Accurate process or model used to complete the exercise: 0 - 20 points Accurate and/or complete answers: 0 - 40 points Demonstration of critical thinking skills: 0 - 10 points Time Estimation Estimated time for completion: 4.0 hour(s) Attachment: FINA301_2e_SherwinWilliams_Example_Financial_Analysis_Exercise_III.docx; page 2 of 2 - 06/15/2017 FINA 301: SHERWIN-WILLIAMS EXAMPLE Supporting Information for Financial Analysis Exercise III Part A: This first part of the exercise asks you to select one of four company stocks and apply the constant- growth model in an attempt to value a share of that stock. Here is the equation for the model, Equation 8-6 in the second edition of the textbook: P0 = D0 (1 g ) i g = D1 i g , where P0 = current price of the stock D0 = dividend per share at the end of the last period D1 = dividend per share at the end of period 1 i = discount rate g = constant growth rate We need to find values for the variables in this equation in order to solve for P0. The discount rate is given to us at 12.5%. So we need to find values for D0, g, and D1. The last variable equals [D0, (1 + g)], so we are left to find only D0 and g. D0 is a historical number. We will look for this number for Sherwin Williams at Yahoo! Finance using data accessed in 2009 for this example: a. At http://finance.yahoo.com/ enter SHW in the input field next to Get Quotes at the top of the page and click Get Quotes to open the stock's overview/main page. b. Click on Historical Prices under the heading \"Quotes\" on the left hand-side of the main/overview page. d. In the section \"Set Date Range\" click in the circle for \"Dividends Only\" and then click \"Get Prices\" to get a history of quarterly dividends that the company has paid. e. Accessing this page for Sherwin-Williams in May 2009 we find the following: Date 13-May-09 $ 0.355 Dividend 25-Feb-09 $ 0.355 Dividend 12-Nov-08 $ 0.35 Dividend 20-Aug-08 $ 0.35 Dividend 14-May-08 $ 0.35 Dividend 27-Feb-08 $ 0.35 Dividend 14-Nov-07 $ 0.315 Dividend 22-Aug-07 $ 0.315 Dividend 16-May-07 $ 0.315 Dividend 28-Feb-07 $ 0.315 Dividend 15-Nov-06 $ 0.25 Dividend 16-Aug-06 $ 0.25 Dividend 17-May-06 $ 0.25 Dividend 1-Mar-06 $ 0.25 Dividend 16-Nov-05 $ 0.205 Dividend 17-Aug-05 $ 0.205 Dividend 18-May-05 $ 0.205 Dividend 24-Feb-05 $ 0.205 Dividend 9-Nov-04 $ 0.17 Dividend 18-Aug-04 $ 0.17 Dividend 26-May-04 $ 0.17 Dividend 19-Feb-04 $ 0.17 Dividend .... ... (Source: http://finance.yahoo.com/q/hp? s=SHW&a=06&b=1&c=1985&d=04&e=28&f=2009&g=v) Based on this recent data we can see that Sherwin-Williams historically pays the same quarterly dividend in any given year, and the quarterly dividend has grown from one year to the next. For D0 we need to decide whether we want to use the annual dividend in the last fiscal year, which in this case is 2008 (like most companies, Sherwin-Williams' fiscal year is the calendar year) or the last 4 quarters. In this example we'll use the last four quarters: D0 = 0.355 + 0.355 + 0.35 + 0.35 = $1.41. If you go to Key Statistics under the heading \"Company\" you should find an identical number for \"Trailing Annual Dividend Rate.\" Above this is a \"Forward Annual Dividend Rate\" which is an estimate of the cumulative dividends over the next four quarters. In May 2009 this number is $1.42, suggesting then that the growth rate in dividends over the next year is estimated to be (D1 - D0)/D0 = ($1.42- $1.41)/$1.41 = 0.007092, less than 1%. We could use this number to estimate g, the dividend growth rate. But first here is what the textbook suggests about estimating g: Investors use several methods to estimate a firm's growth rate...they can project the dividend trend into the future and determine the implied growth rate, compute the past growth rate, or even consider a financial analyst's growth rate predictions. Source: Cornett, M.et al. (2012). Finance: Applications & Theory (2nd ed.). New York: McGraw-Hill Irwin, p. 272. Looking at the historical dividend payments in the recent past we can calculate a past growth rate. Just using the few years in the data above we can calculate the following: Annual Dividend Annual Growth Rate 2009 (est.): 4 $0.355 = $1.42 ($1.42- $1.40)/$1.40 = 0.014286 2008 : 4 $0.35 = $1.40 ($1.40- $1.26)/$1.26 = 0.111111 2007: 4 $0.315 = $1.26 ($1.26 - $1.00)/$1.00 = 0.260000 2006: 4 $0.25 = $1.00 ($1.00- $0.82)/$0.82 = 0.219512 2005: 4 $0.205 = $0.82 ($0.82 - $0.68)/$0.68 = 0.205882 2004: 4 $0.17= $0.68 Average Annual Growth Rate = (0.014286 + 0.111111 + 0.260000 + 0.219512 + 0.205882)/5 = 0.810791/5 = 0.162158 Of course, we could extend this analysis further back in time and such an effort is aided by the Excel feature at the bottom of the page in Yahoo! Finance. You should note that given an assumed discount rate, i, of 12.5%, this 5-year average would result in a negative denominator in the constant-growth equation and result in a negative price for the stock, which is not a realistic result. An alternative is to look at financial analyst estimates of growth. Under the heading \"Analyst Coverage\" on the left-hand side of the overview page click on Analyst Estimates. On this page at the bottom there are various estimates of earnings growth: Current Quarter, Next Quarter, This Year, Next Year, and the Next 5 Years (per annum) as well as Past 5 Years (per annum). There are similar estimates for the industry Sherwin-Williams is in, its sector, and the S&P 500. In 2009 this data was: Growth Est Current Qtr. Next Qtr. This Year Next Year Past 5 Years (per annum) Next 5 Years (per annum) SHW -17.2% -10.7% -15.8% 14.6% 5.258% 8.08% Industry -46.2% 27.5% -33.8% 31.6% N/A 11.4% Sector -42.6% -32.6% -31.6% 13.5% N/A 9.95% S&P 500 -37.1% 27.2% -12.5% 30.2% N/A N/A (Source: http://finance.yahoo.com/q/ae?s=SHW) Assuming a constant payout ratio, i.e., dividends are a fixed percentage of earnings, then an historical earnings growth and projected earnings growth can serve as estimates for dividend growth. Here are the estimates for g so far: Growth in the Dividend from 2008 to 2009: 0.007092 Average Annual Growth in the Dividend from 2004 to 2009: 0.162158 Analysts Past Five Year Earnings Growth Rate: 0.05258 Analysts Next Five Year Earnings Growth Rate: 0.0808 Any of these, except the second as noted above, are justifiable choices for g. Use your own judgment. Let's use the Analysts Next Five Year Earnings Growth Rate of 0.0808. Note: Alternatives to financial data from Yahoo! Finance include Mergent Online via the online library at http://www.franklin.edu/en_us/library.franklin.edu/. More generally, you can always access the original financial statement filings of public companies via the U.S. Securities and Exchange Commission's Edgar database available at http://www.sec.gov/edgar/searchedgar/companysearch.html At this site enter the company's ticker symbol in the input box to get the listing of all filings the company has made with the SEC. Enter \"10-K\" in the \"Form Type\" box in the upper right to retrieve annual financials for the company. Enter \"10-Q\" to get quarterly financials. Typically these documents are lengthy so it may take some time to locate the financial data you are seeking, but they are the source documents for financial information for public companies in the U.S. P0 = Estimated Current Price of a Share of Sherwin Williams Stock = Intrinsic Value P0 = D0 (1 g ) k g = D1 k g = $1.41(1.0808) .125 0.0808 = $1.523928 0.0442 = $34.478009 Now go back to the Sherwin-Williams overview page and look at the Quote line. The first number is the latest stock price. At the close on May 27, 2009 the price of a share of SherwinWilliams' stock is quoted at $53.04. Consider the following questions: How does it compare with our calculated intrinsic value? Is Sherwin Williams a good buy? Does our calculation of P0 suggest that the current market price is overvalued or undervalued? If you're not comfortable with our results, you can try adjusting the growth rate given the rate of return. What does it take to get a price that's reasonably in line with the market's thinking? Part B: The second part of the exercise asks you to estimate the price of your stock in five years using Equation 8-10 in the textbook's second edition P5 = P E 5 E5 = P E 5 E0 (1 + g)5 where P5 = price of the stock in five years P E 5 = price-earnings ratio in year 5 E5 = Earnings per share in year 5 E0 = Most recent Earnings per share g = constant growth rate In Part A we applied a growth rate of 8.08%. At Yahoo! Finance we can find both a trailing P/E ratio and earnings per share on the overview page. In May 2009 these numbers were a P/E (ttm) of 14.41 and an EPS (ttm) of $3.68, where ttm is an abbreviation for \"trailing twelve months.\" Based on the equation above, we can use this EPS number but the textbook suggests that it is perhaps preferable to use a forward P/E, which is available under \"Valuation Measures\" at Key Statistics under the \"Company\" heading. This number in May 2009 was given as 12.75. The book states that generally the best estimate for a firm's future P/E is its current P/E. Applying these numbers to Equation 7-10 yields: P5 = P E 5 E0 (1 + g)5 = 12.75 $3.68 (1.0808)5 = 12.75 $3.68 1.474778 = $69.19659 To get an idea of the valuation of the firm relative to its industry and the market, we can return to Analyst Estimates where there are growth estimates of the company's P/E relative to its industry, sector, and the S&P 500 as follows: Growth Est SHW Industry Sector S&P 500 Price/Earnings (avg. for comparison categories) 14.61 23.18 14.69 15.81 Alternatively, we can first identify the firm's industry and investigate that in more detail. From the overview page for Sherwin-Williams click on Industry under the heading \"Company.\" In 2009 the company's sector was classified as Basic Materials and its industry was classified as Chemicals-Major Diversified. (Please note these classifications have changed since 2009; currently it appears that the company's sector and industry are now classified as Industrial Goods and General Building Materials, respectively.) Clicking on the industry brings us to a page that provides a list of competitors and some basic industry statistics. Below the table with these statistics click on \"View Industry Browser\" which provides detailed comparative ratios for the sector, industry, and firms in that industry, including trailing P/Es. In 2009 Sherwin-Williams' trailing P/E of 14.41 fell below the sector average of 17.74 and the industry average of 18.70. To get comparative data on 5 year earnings growth estimates recall in the table above in Part A in Analyst Estimates these were given for Sherwin-Williams, the industry, and the sector. Growth Est SHW Industry Sector S&P 500 Next 5 Years (per annum) 8.08% 11.4% 9.95% N/A (Source: http://finance.yahoo.com/q/ae?s=SHW) Alternatively, we can visit the individual sites of Sherwin-Williams' competitors and retrieve their analyst earnings growth estimates, which in 2009 were: Industry Competitor Air Products & Chemicals Inc. (APD Ashland Inc. (ASH) Analysts Next Five Year Earnings Growth Rate 6.72% 11% Celanese Corp. (CE) Dow Chemical Co. (DOW) Eastman Chemical Co. (EMN) EI DuPont de Nemours & Co. (DD) FMC Corp. (FMC) Average 15.11% 7% 7% 4.07% 8% 58.9%/7 = 8.414286% From the above it appears that Sherwin-Williams' estimated earnings growth over the next five years is average for its industry and has an estimated P/E that is below average, suggesting it is undervalued