Question
Problem (please provide detailed formula and analysis used to get answers) a) - Estimate a possible growth value, g1 , for use in the first
Problem (please provide detailed formula and analysis used to get answers)
a) - Estimate a possible growth value, g1, for use in the first stage of a two stage (differential) growth dividend discount model by computing the average annual historical growth, g, of sales, earnings (net income) and dividends over the past five years. Use these actual results to help you form an expectation for g1.
b) - Estimate a value for R by computing 1) - the annual historical total return on the common stock for each year then calculate. 2) - the arithmetic average annual historical return for the 5 year period. The arithmetic average annual historical return that the markets have rewarded a firm with is sometimes used as an "empirical estimate" of future return or expected return, R. Is the market total return constant in each year?
Formula for Annual Return = [adjusted close price December (t) - adjusted close price December (t-1)] / adjusted close price December (t-1)
2016 | 2015 | 2014 | 2013 | 2012 | ||
For the years ended December 31 | ||||||
Net Sales | $17,509 | $19,110 | $19,221 | $17,301 | $17,334 | |
US percentage of sales | 54% | 56% | 52% | 48% | 47% | |
Non-US percentage of sales | 46% | 44% | 48% | 52% | 53% | |
Gross margin | 4,452 | 4,947 | 4,861 | 4,280 | 4,416 | |
Research, development and engineering expenses | 636 | 735 | 754 | 713 | 728 | |
Equity, royalty and interest income from investees | 301 | 315 | 370 | 361 | 384 | |
Interest expense | 69 | 65 | 64 | 41 | 32 | |
Net income attributable to Cummnins Inc. | 1394 | 1399 | 1651 | 1483 | 1645 | |
Earnings per common share attributable to Cummins Inc. | ||||||
Basic | $8.25 | $7.86 | $9.04 | $7.93 | $8.69 | |
Diluted | 8.23 | 7.84 | 9.02 | 7.91 | 8.67 | |
Cash dividends declared per share | 4 | 3.51 | 2.81 | 2.25 | 1.8 | |
Net cash provided by operating activities | $1,935 | $2,059 | $2,266 | $2,089 | $1,532 | |
Capital expenditures | 531 | 744 | 743 | 676 | 690 | |
At December 31, | ||||||
Cash and cash equivalents | $1,120 | $1,711 | $2,301 | $2,699 | $1,369 | |
Total assets | 15,011 | 15,134 | 15,764 | 14,728 | 12,548 | |
Long-term debt | 1,568 | 1,576 | 1,577 | 1,672 | 698 | |
Total equity | 7,174 | 7,750 | 8,093 | 7,870 | 6,974 | |
Adjusted Close Price | ||||||
December 1, | 138.51 | 82.82 | 131.82 | 126.41 | 95.4 | |
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