FINANCIAL MANAGEMENT – FINA 1082

Financial management

QUESTION 2
Stock valuation of two companies
Two companies selected: 3M (industrial) & Cardinal Health (Health and social care)
Valuation for 3M
3 M
High growth phase
Particulars Amount
Dividend per share 4.1
Risk-free rate (Rf) 0.51%
Beta value (β) 1.17
Market return (Rm) 2.66%
Risk premium Rm-Rf 2.15%
Required rate of return on investment
(r) Rf+(Rm-Rf)*β 3.03%
Payout ratio 50.90%
ROE 35.08%
Growth rate
(1-Payout
ratio)*ROE 17%
Year Expected dividend
0 4.10
1 4.81
2 5.63
3 6.60
4 7.74
5 9.08
Year
Expected
dividend
Discounting factor at
3.03%
Discounted
values
1 4.10 0.97 3.98
2 4.81 0.94 4.53
3 5.63 0.91 5.15
4 6.60 0.89 5.86
5 7.74 0.86 6.67
Total present
value 26.19
Stable growth
Dividend per share 4.10
Required rate of return (r) 3.03%
US inflation rate 0.20%
GDP growth rate in US 2.10%
Stable growth rate (g) 2.30%