Equity Valuation and Analysis - Mark Moore

Valuations
In determining Dow’s current state, we used several valuation models that were
precisely weighted to conclude if Dow’s stock price is overvalued, undervalued, or
priced fairly. We had to base our valuation on the intrinsic models, because the
method of comparables had too many inconsistencies within the industry. Although
these comparables were not completely relevant in our valuation, they showed that
Dow’s stock price was slightly undervalued. Once again, these ratios did not carry a
heavy weight in our decision of valuing our company, because the 8 different valuation
ratios were scattered with a wide range of prices.
In shaping our final estimates of Dow’s value, we looked closely at the five
intrinsic models that include: Residual Income Model, Free Cash Flow Model,
Discounted Dividend Model, Abnormal Growth Model, and Long-Run Return on Equity.
The least accurate model within our valuation was the Discounted Dividends model
because it is extremely difficult to forecast dividends, growth, and treasury re-purchases
and issuances. This model yielded the highest price ($32.53) of any other model due to
these fallacies. The Residual Income model was the most precise and held the largest
bias for our estimation of Dow’s stock price due to the accurate estimations of expected
returns and earnings. This model valued our price per share to be $24.20. Although
Residual Income was the most accurate model, Free Cash Flows and the Abnormal
Earnings Growth models were also both consistent. This isn’t surprising because of the
tie between the Residual Income Model and AEG. These models contributed to our
valuation that Dow is overvalued.
Business & Industry Analysis
Company Overview
Dow Chemical Co. (DOW) is the top American based chemical company and the
second largest in the world. Dow is well diversified, leaning heavily on innovation and
Dow Chemical Analysis Page 7