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

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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
Sensitivity AnalysisGrowth Rates0.04 0.05 0.059 0.065 0.070.07 $43.89 $61.24 $103.84 $217.45 n/a0.08 $30.54 $38.44 $ 52.00 $ 70.07 $101.70WACC 0.0872 $24.03 $29.09 $ 36.70 $ 45.21 $ 56.84BT 0.1 $15.74 $18.38 $ 21.84 $ 25.15 $ 28.910.11 $10.99 $12.70 $ 14.83 $ 16.71 $ 18.72Undervalued $94.29 Actual PPS (June 1, 2007): $81.99The free cash flows model requires the following information: forecastedearnings, dividends, cash flows from operations and investments, the before taxweighted average cost of capital, book value of equity, and growth rate of theperpetuity.To begin, the difference in operating cash flows and investing cash flowsgives the annual free cash flow. Because we are looking at year now, all ofthese cash flows had to be brought back by multiplying them by the presentvalue factor. The sum of all of these cash flows, $9,504 million, plus the presentvalue of the perpetuity, $6,747 million, gave us the value of the firm,$16,251million. This value minus the book value of liabilities leads to the market value ofequity divided by the number of shares outstanding to reach the estimated priceper share.$16,251-8,385=$7,866$7,866/266=$34.80Because J. C. Penney’s fiscal year ends on January 31, this price per sharewas not in fact the price used to value our sensitivity analysis. To bring thisnumber to June 1, 2007, the date of firm valuation, this share price wasmultiplied by the weighted average cost of capital raised to five months dividedby twelve months.$34.80*1.0872^(5/12)=$36.70116
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J. C. Penney Company, Inc. Equity V
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Industry AnalysisIn 1902, James Cas
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Financial Analysis, Forecast Financ
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Business & Industry AnalysisCompany
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Industry OverviewThe retail industr
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Five Forces ModelThe Five Forces Mo
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ConcentrationThe level of concentra
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capable of offering lower prices th
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If a firm wishes to shut down, it m
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Legal BarriersMany industries have
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These costs include issues such as
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Bargaining Power of SuppliersThe de
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The relative bargaining power of th
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Competitive StrategiesIn order to a
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Department stores have to focus on
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The Big PicturePlayers in this indu
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Lower Input CostsJ. C. Penney is at
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in the last five years. This trend
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convenient for different consumers
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transactions have been improperly s
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Penney does state in its annual rep
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Operating and Capital LeasesOperati
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Potential Accounting FlexibilityA f
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truly are. J. C. Penney, however, h
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Qualitative Analysis of DisclosureT
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we can see why targeting the strong
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manipulation diagnostics for J. C.
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Net Sales/Net Accounts ReceivableNe
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Net Sales/Unearned Revenue1200Net S
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Below is a chart of sales manipulat
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As for the industry, all the compan
Page 66 and 67: Pension Expense/SG&APension Expense
Page 68 and 69: Below is a chart of all expense man
Page 70 and 71: discount rates in respect to pensio
Page 72 and 73: Financial Analysis, Forecast Financ
Page 74 and 75: paying off their short-term obligat
Page 76 and 77: ecause many firms in this segment o
Page 78 and 79: Penney’s inventory turnover is in
Page 80 and 81: ConclusionAnalysis through liquidit
Page 82 and 83: operating efficiency because the fi
Page 84 and 85: Return on AssetsReturn on Assets0.1
Page 86 and 87: Capital Structure AnalysisWhen look
Page 88 and 89: however, in 2006, J. C. Penney show
Page 90 and 91: Sustainable Growth RateSustainable
Page 92 and 93: average of only years 2005 and 2006
Page 94 and 95: (reported in millions)Annual Income
Page 96 and 97: We then began to look at the equity
Page 98 and 99: Common Size Balance Sheet 2002 2003
Page 100 and 101: (numbers in millions)Statement of C
Page 102 and 103: ConclusionOverall, it appears that
Page 104 and 105: Inc. We set these averages equal to
Page 106 and 107: Price to BookPPS BPS P/B IndustryAv
Page 108 and 109: Price Earnings GrowthPPS EPS PEG In
Page 110 and 111: y J. C. Penney’s EBITDA. Then we
Page 112 and 113: Regression Analysis3 Month Rate 72
Page 114 and 115: Intrinsic ValuationsIntrinsic valua
Page 118 and 119: This particular stock price in our
Page 120 and 121: esidual income or converge. Future
Page 122 and 123: To find our long run return on equi
Page 124 and 125: Sensitivity AnalysisGrowth Rates0 -
Page 126 and 127: for this large difference between s
Page 128 and 129: Analyst RecommendationAfter careful
Page 130 and 131: AppendixLiquidity RatiosCurrent rat
Page 132 and 133: Capital Structure RatioDebt to equi
Page 134 and 135: SUMMARY OUTPUT3 Month Regression72
Page 136 and 137: SUMMARY OUTPUT6 Month Regression72
Page 138 and 139: SUMMARY OUTPUT2 Year Regression72 M
Page 140 and 141: SUMMARY OUTPUT5 Year Regression72 M
Page 142 and 143: SUMMARY OUTPUT10 Year Regression72
Page 144 and 145: Cost of Equity 0.1361Estimated Pric
Page 146 and 147: Discount Dividends Model0 1 2 3 4 5
Page 148 and 149: Residual Income Model WACC(AT) 0.07
Page 150 and 151: Z-Score AnalysisZ-Score=1.21.43.320
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