Valuation of the Business Using Residual and Earnings Methods

Running head: FINANCE
Finance
Name of the Student:
Name of the University:
Author’s Note:

FINANCE
1
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.

FINANCE
2
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

FINANCE
3
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.
Valuationunder Residual EarningsMethod:
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
IntrinsicValue 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