J. C. Penney Company, Inc. Equity Valuation and Analysis As of ...

amount in the eye’s of shareholders due to the small dividends that are paid out.If one were to divide the present value of the sum of the dividends for the nextten years and the perpetuity dividend present value by the total value of thefirm, one can notice that about 70 percent of the value of our firm comes fromthe perpetuity. This proves how inaccurate this model can be because we arerelying heavily on a perpetuity that is full of assumptions.Within our sensitivity analysis, we observed that the only way J. C. Penneywas fairly valued was by cutting cost of equity to 11.8 percent and having adividend growth rate of 11.4 percent. We believe that J. C. Penney could not cuttheir cost of equity all the way to only 11.8 percent from their actual 13.61percent at the moment. J. C. Penney could be undervalued if the cost of equitywas cut down to 12 percent or lower and needed to grow dividends at least at11.5 percent. We do not believe J. C. Penney could cut the cost of equity thatmuch or grow dividends at these rates because besides some outliers it hasnever followed this pattern in the past. Even though the discount model doesnot show a clear understanding of our firm due to the low dividend payments, itillustrates that J. C. Penney is overvalued due to its high share price of $81.99.Free Cash Flows ModelThe free cash flow model compares the cost of capital to growth rate onthe perpetuity. The percentage of the both present value of future cash flowsand terminal value perpetuity are almost equally weighted in the valuation of thefirm. For this reason, this model is seen as a fairly inaccurate model. Eventhough cash flows make up about 58 percent of the value, 42 percent is still alarge weight to have on a number so sensitive to growth rates. Following is thesensitivity analysis and discussion of the free cash flows model applied to the J.C. Penney Company.115