M3 Mini-Case Valuing Carnival Corporation Carnival Corp. provides cruises to major vacation destinations. Carnival operates 100 cruise ships with a total capacity of 180,746 passengers in North America, Europe, the United Kingdom, Germany, Australia, and New Zealand. The company also operates hotels, sightseeing motor coaches and rail cars, and luxury day boats. These activities generated earnings per share of S1.67 for 2012. The stock price at the end of 2012 was S36.77. The previous stock prices and dividends are shown in the following table Annual dividend Stock price in the following Jan 200520062007200820092010 2011 2012 $0.80$1.025 $1.375$1.20$0.00 $0.40 $1.00$1.00 $51.76 $51.56 $44.40 $18.19$33.33 $38.80 $32.64 $36.77 Carnival is a firm in the General Entertainment industry, which is in the Services sector. The following table shows some key statistics for Carnival, the industry, and the sector. General Carnival EntertainmentServices Sector Kev Statistic P/E ratio Dividend vield Next 5 21.17 2.80% 12.91% 15.30 3.05% 18.74% 12.65 1.69% 14.23% owth Use the various valuation models and relative value measures to assess whether Carnival stock is correctly valued. Compute value estimates from multiple models. The appropriate required rate of return is 11 percent. It will be useful to calculate the stock price for the end of 2012 from various methods to compare to the actual value realized at the time, $36.77 per share Note that the growth rate is currently the same or higher than the discount rate, so the constant growth rate model cannot be used. Determine the dividends to 2017, using the same growth rate at which the dividends had been growing before the financial crisis and then use a terminal P/E ratio of 16 to compute the future price. Then find the PV of these cash flows. So first, determine the historical dividend growth rate? Then use this percent growth rate to find the next five dividends (D1, D2, D3, D4, D5) or Next, to calculate the stock price in 2017, use the formula P,-(P/E)s * Es= (P/E)s * E0* (1+growth)5 Now find the present value, Po or P12 of these cash flows