Finance Report: Equity Valuation, Credit Quality, and Ratios

This finance report analyzes the equity valuation of Campbell Soup Company using the Residual Earnings method and the Earnings Growth method. The report calculates the intrinsic value of the shares under both methods, concluding that the shares are overvalued in the market. It then assesses the credit quality of the business by examining long-term debt, profit trends, liquidity, and various financial ratios such as the current ratio, time interest earned ratio, debt ratio, and operating margin. The analysis indicates a decreasing trend in profits but an improvement in some credit metrics. The report concludes by discussing the advantages of each valuation method and the implications of the findings for the company's financial health and creditworthiness.

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Finance
Name of the Student:
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Author’s Note:

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Executive Summary
The main purpose of the assignment is to analyse the valuation method which applied for the
valuation of equity of the business. For the purpose of valuation Residual earnings method and
Earnings growth methods are used. The assignment also involves analysing both the method and
commenting on the usefulness of the methods in the valuation of equity. In the part two of the
report, the assignment will be dealing with the credit worthiness on the basis of the ratios
calculated.

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Table of Contents
Part 1................................................................................................................................................3
Introduction..................................................................................................................................3
Valuation of Equity......................................................................................................................3
Conclusion:..................................................................................................................................4
Part 2................................................................................................................................................5
Credit Quality of the Business.........................................................................................................5
Reference.........................................................................................................................................7
Appendix..........................................................................................................................................8

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Part 1
Introduction
Campbell Soup Company is engaged manufacturing and production of canned soup and
the company operates in more than 120 countries and is a popular brand among the European
countries. The company has earned a net profit of $ 563 million in 2016. As per the business
model of the company the company is looing for innovative ways to introduce new products in
the market.
Valuation of Equity
For the purpose of calculating the intrinsic value of the equity shares the company has
applied Residual earnings method and Earnings Growth method (Damodaran 2012). Residual
valuation method considers the current book value of the equity and the future residual value of
the equity for the purpose of calculation of the intrinsic value of the equity (O'Sullivan and
McCallig 2012). Whereas earnings growth model considers the growth rate of expected
dividends in the following years to compute the present fair value of the stocks. As per following
the calculations which are given the intrinsic value of the shares under residual earning method is
$ 13.38 which is lower than the market value of the stock which signifies that the shares are
overvalued.
Valuation under Residual Earnings Method:
Particulars 2014 2015 2016
Cost of Capital 12.30% 12.30% 12.30%
Book Value of Equity $1,20,00,000 $1,20,00,000 $1,20,00,000
Net Income $66,60,00,000 $56,30,00,000
Equity Charge $14,75,848 $14,75,848
Residual Earnings $66,45,24,152 $56,15,24,152
Terminal Value $4,56,57,07,718
PV of Residual Earnings in 2015 $59,17,46,800
PV of Terminal Value $3,62,04,15,383
Book value in 2014 -$1,20,00,000
Total Value of Shares $4,20,01,62,183
Nos. of Shares in 2014 31,40,00,000
Intrinsic Value per share $13.38
Market Price per share $42.79
Remarks Overvalued
Again, under Earnings Growth model, the valuation of the intrinsic value of the shares is
$10.15 which is less than the market valuation and thus under this method also the shares are

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overvalued in terms of the intrinsic value of the shares calculated (Balachandran and Mohanram
2012).
Valuation under Earnings Growth Analysis
Particulars 2014 2015 2016
Cost of Capital 12.30% 12.30% 12.30%
Dividend paid per share $1.248 $1.248 $1.248
Dividend Growth Rate 0.00% 0.00%
Intrinsic Value per share $10.15
Market Price per share $42.79
Remarks Overvalued
Conclusion:
The most basic advantage of using Residual Earning model is that the it is based on the
accounting measure of profit and it considers the cost of equity in the calculation of the intrinsic
value of shares. The advantage of using Earnings Growth method of valuation is that the method
is very simple to understand and follow and it also brings a realistic value on the basis of growth
in the retained earnings, which in turn, helps to increase the total value of equity (Mielcarz and
Mlinarič 2014). In this case for Cambell Soup company the information provided in the financial
statements of three years are considered which are 2014, 2015 and 2016. The valuation of equity
shows that the company’s share is overvalued under both method. The assumption on the basis
of which the intrinsic value is calculated is that it is expected that the company share value will
not be growing further from 2016. As per estimates, both residual value method and Earnings
Growth method of equity valuation provides a reliable valuation of shares if the methods are
effectively applied (Damodaran 2013). The results of the valuation make it clear that the
company has shares which have a higher value in the market which in other words means that
the company’s shares are overvalued.
Part 2
Credit Quality of the Business
The credit quality of the company refers to the long-term loans which are taken by the
business. The Loan which are taken by the business are shown in the financial statement of the
company. The balance sheet of the company shows that the company has a long-term debt of $
2,314 million as per the financial statement of the company for the year 2016. The loan amount
has decreased from the previous year figure (Duffie and Singleton 2012).
The business has been earning decent amounts of profits over the last three years,
however the trend in profits is a decreasing one which is a matter of concern for the business.
However, such can be improved by the business. The long-term long which is shown in the
balance sheet of the company poses a risk which the company wants to reduce by paying off the

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loans. The free cash flow of the company has reduced significantly due to the net debt figure
which is shown in the calculation which is negative (Bielecki and Rutkowski 2013). The current
ratio of the company has slightly increased from the previous year figure which was 0.746 in
2015 and the ratio has slightly improved to 0.747 in 2016. This is a matter of concern for the
company as the liquidity of the company is not that good as per the results of the company. The
low current ratio of the company also suggest that the company might be facing from liquidity
crisis as the current ratio of the company is lower than one. The time interest earned ratio of the
company has decreased from the previous year results. The interest coverage ratio deals with the
debt servicing of the company and generally a higher ratio is preferred and the company has a
decent interest coverage ratio. The debt ratio of the company has decreased from the previous
years results which is favorable considering the company is trying to reduce the debt capital of
the company. The operating margin of the company shows that the operating profit of the
company has decreased from last year’s figure which can be attributed to the debt servicing costs
which the company needs to incur. The operating margin of the company as calculated for 2016
is 12.059%.
Ratio Analysis:
Particulars 2014 2015 2016
Current Assets $2,10,00,00,000 $2,09,30,00,000 $1,90,80,00,000
Current Liabilities $2,98,90,00,000 $2,80,60,00,000 $2,55,50,00,000
Interest Expense $12,20,00,000 $10,80,00,000 $11,50,00,000
EBIT $1,19,20,00,000 $1,05,40,00,000 $96,00,00,000
Total Debt $6,51,00,00,000 $6,70,00,00,000 $6,30,40,00,000
Total Assets $8,11,30,00,000 $8,07,70,00,000 $7,83,70,00,000
Net Sales $8,26,80,00,000 $8,08,20,00,000 $7,96,10,00,000
Current Ratio 0.703 0.746 0.747
Time Interest earned Ratio 9.770 9.759 8.348
Debt Ratio 0.802 0.830 0.804
Operating Margin 14.417% 13.041% 12.059%
The credit risk of the company has reduced a bit as the company is trying to pay off the
long-term debts of the company and this is expected to improve the operating profit and net
profit of the company as well.

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Reference
Balachandran, S. and Mohanram, P., 2012. Using residual income to refine the relationship
between earnings growth and stock returns. Review of Accounting Studies, 17(1), pp.134-165.
Bielecki, T.R. and Rutkowski, M., 2013. Credit risk: modeling, valuation and hedging. Springer
Science & Business Media.
Damodaran, A., 2012. Investment valuation: Tools and techniques for determining the value of
any asset (Vol. 666). John Wiley & Sons.
Damodaran, A., 2013. Valuing financial services firms.
Duffie, D. and Singleton, K.J., 2012. Credit risk: pricing, measurement, and management.
Princeton University Press.
Mielcarz, P. and Mlinarič, F., 2014. The superiority of FCFF over EVA and FCFE in capital
budgeting. Economic research-Ekonomska istraživanja, 27(1), pp.559-572.
O'Sullivan, D. and McCallig, J., 2012. Customer satisfaction, earnings and firm value. European
journal of marketing, 46(6), pp.827-843.

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Appendix
Figure1: Statement of Income for 2016

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Figure 2: Consolidated Balance Sheet for 2016

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Figure 3: Cash flow Statement for 2016

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Figure 4: Statement of Income for 2014

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Figure 5: Balance Sheet for the Year 2014