This case continues the financial statement analysis of Procter & Gamble Co. begun in Minicase 9.1 and developed further in Minicases 11.1 and12.1. This installment focuses on forecasting and valuation, with further development in Minicase 15.1 in the next chapter.

Financial statements for Procter & Gamble are presented in Exhibit 9.15 in Chapter 9. If you worked Minicase 9.1, you will have reformulated the income statements and balance sheets to distinguish operating activities from financing activities. If you worked Minicases M11.1 and 12.1, you will have reached an understanding of P&G's core profitability and the factors that drive that profitability. If not, you should do so now.

To start, calculate residual core operating income for the years 2006-2008 and note changes overtime. Use a required equity return of 8.5 percent but convert it to an unlevered required return (for operations). In July 2008, just after the fiscal year ended, the 3,033 million outstanding shares of P&G were trading at $64.The risk-free rate was about 4.5 percent, so an 8.5 percent required return implies a 4 percent risk premium suitable for equity with a beta less than 1.0. What is the trend in residual operating income? Does P&G appear to be a growth company? What drives the trend?

A. Develop forecasts of residual operating income for 2009 and growth there after based solely on information in the financial statements. Your analysis should include a no growth (SF2) forecast, along with a (SF3) forecast that includes growth. Consider a weighted-average SF3 forecast. Do you think these forecasts are applicable to P&G?

Carry out a sensitivity analysis to changes in inputs by developing a valuation grid.

B. Analysts were forecasting $4.28 in earnings per share for fiscal year 2009. How does the analyst forecast compare with yours?

C. Calculate the (traded) enterprise price-to-book ratio and reconcile it to the levered price-to-book ratio. Now calculate an intrinsic enterprise P/B using equation 14.3a in this chapter. Do you think the $64 price is reasonable?