Equity Valuation and Analysis - Mark Moore

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To find the long run return of equity, we first found the ROE for next ten years by dividing the net income by the previous year’s book value of equity. We then averaged this number out, which was the long run return on equity. Book Value of Equity 19353 21919.9 24793.8 28005.3 31588 35578.5 40017 44947.3 50417.4 56479.7 Ending BVE = Beginning BVE + Earning – Dividend ROE= Net Income current / BVE of the previous year ROE 0.2196 0.2111 0.2032 0.1958 0.1889 0.1826 0.1767 0.1712 0.1662 0.1615 Then to find the growth rate, we simply took the current BVE minus the previous BVE and then divided by the previous BVE. We assumed that Dow’s ROE would hit a plateau at around 15%. Growth Rate = BVE current –BVE previous / BVE Previous Growth of Equity 13.26% 13.11% 12.95% 12.79% 12.63% 12.48% 12.32% 12.17% 12.02% After viewing the results above, we noticed the decreasing growth rates of Dow’s book value of equity. We assumed that it would on average hit a plateau at 11%. Now that we had the long run return on equity and the long run growth rate of equity, we were able to plug these numbers into the following equation Value of Firm = BVE ( 1 + ((LR Return on Equity – Ke / (Ke – LR Growth Rate))) Then, we divided this number by the number of shares outstanding (962.3) to get the price per share. This gave us a share price of $18.64, which we to November 1, to be $20.94. This shows that Dow is clearly overvalued. The only way Dow could be Dow Chemical Analysis Page 110
fairly valued would be to have a ROE of 19 percent. Since the trend seems to be headed to for a much smaller percentage, which does not seem feasible. Overall, the sensitivity analysis showed that Dow Chemical is an overvalued firm. Analyst Recommendation After careful research of Dow Chemical, including a five forces analysis, industry analysis, accounting analysis, financial analysis, forecasting models, valuation models, and future financial statements it is in our opinion that we are slightly overvalued. From this opinion we would advise to sell. We came to theses conclusions from past financial statements, Dow’s 10-k, along with three other competitors’ financial statements. These competitors include Huntsman, DuPont, and Lyondell. Seeing that the chemical industry is highly concentrated this requires key success factors that each competitor must follow in order to gain a competitive advantage. Some of these include economies of scale, operating efficiency, low input cost, efficient production, and most important research and development. According to our accounting ratios Dow is one of the leading competitors in the industry. Besides working capital Dow holds the bar high for any competitor that exists or chooses to enter the industry. However, where Dow falls short is the disclosure of their financial information. In effect this created misleading numbers throughout their financial statements as well as GAP. For Dow their disclosure has become worse where as their competitors do a fair job of disclosing their financial information. Overall, for their financial ratios Dow has had a positive outlook in the market when calculating these. When we looked at forecasting the statements we took a below average growth rate of the past five years to determine future values. Looking back at the previous Dow Chemical Analysis Page 111
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Equity Valuation and Analysis Frank
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Executive Summary Investment Recomm
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Accounting Analysis When analyzing
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Valuations In determining Dow’s c
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in July of 2006. Comparing Dow’s
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Dow provides consumers with special
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States as well as some smaller area
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ample amount of excess capacity. Gi
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Market Share within United States 5
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It is also important to note that t
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First we must consider scale of eco
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The bargaining power of buyers can
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Price sensitivity of suppliers in t
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cases, firms will choose to impleme
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strategy to gain or maintain market
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cannot compete on a large scale of
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approximately $600-800M/yr. It is t
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company with the most innovative, c
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identification of accounting polici
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Post-Retirement Benefit Plans The c
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As seen in previous figures, firms
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policies. These variations can acco
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certain numbers effecting key succe
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Operating leasing is considered a r
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transparent view of how a company o
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cards. In a perfect sales environme
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The inventory turnover is key indic
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The Asset Turnover ratio is one way
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This ratio is an indication of how
Page 59 and 60: determined that they were easily wi
Page 61 and 62: shown growth approaching just under
Page 63 and 64: inventories within a year; therefor
Page 65 and 66: how efficient a company is in exten
Page 67 and 68: inventory sit on the shelves, the l
Page 69 and 70: Liquidity Overview In the overall s
Page 71 and 72: OPERATING PROFIT MARGIN 2002 2003 2
Page 73 and 74: Net Profit Margin 2002 2003 2004 20
Page 75 and 76: Return on Assets 15% 10% 5% 0% -5%
Page 77 and 78: interest requirements on debt” (R
Page 79 and 80: to fall into debt financing and pos
Page 81 and 82: endeavors and cash flows. In 2006,
Page 83 and 84: Financial Statement Forecasting Ana
Page 85 and 86: Income Statement When forecasting t
Page 87 and 88: Balance Sheet To start on the balan
Page 89 and 90: To find the forecast for total liab
Page 91 and 92: Statement of Cash Flows Seeing as c
Page 93 and 94: Cost of Debt Liabilities Source Int
Page 95 and 96: acquired at a rate of Ke. These 2 s
Page 97 and 98: Trailing method divides the given p
Page 99 and 100: DIVIDEND PPS D/P HUN N/A DD 1.48 48
Page 101 and 102: EBITDA PPS P/EBITDA HUN 0.7365 18.9
Page 103 and 104: EBITDA EV EV/EBITDA HUN 0.7365 7.23
Page 105 and 106: financial statement, and a calculat
Page 107 and 108: Out of all of the intrinsic valuati
Page 109: This sensitivity analysis was used
Page 113 and 114: Net Sales/Cash from sales 2002 2003
Page 115 and 116: Altman Z-score 2002 2003 2004 2005
Page 117 and 118: SUMMARY OUTPUT 36 Month Regression
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Equity Valuation and Analysis - Mark Moore

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