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

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To find our long run return on equity, we found the ROE for the next tenyears using our forecasted earnings and book value of equity. The book value ofequity had not been forecasted but it is very simple to find by using the followingequation:Ending BVE= Beginning BVE +Earnings- DividendsOnce this was done we used the return on equity equation of:ROE= Net Income (Earnings) of this year/ BVE of previous yearROE 29.52% 24.97% 21.77% 19.39% 17.60% 16.17% 15.00% 14.06% 13.26% 12.57%We got the results above that helped us see the pattern of J. C. Penney’s returnon equity for the next ten years so we could make some assumptions of the longrun return on equity. J. C. Penney’s return on equity has a trend of decreasinguntil it hits a plateau at around 12 percent.We then needed to find the long-run growth of return on equity. Wecalculated the percentage change of book value of equity in order to see the longrun trend. This percentage change was calculated by taking this year’s bookvalue of equity divided by the previous years book value of equity thensubtracted that amount by one.BVE %Growth 25.30% 21.61% 19.00% 16.80% 15.38% 14.24% 13.13% 12.40% 11.78% 11.25%We got the results above that helped us see the decreasing growthpattern of J. C. Penney’s book value of equity. We assumed that it has onaverage hit a plateau of about 11 percent.121
Once we found both long-run return on equity and long-run growth ofequity, we plugged these numbers into the following equation:Value of Firm= BVE (1+((LR Return on Equity – K e /( K e - LR Growth of Equity))We then divided by the amount of outstanding shares we have at the moment,226, to get our individual price per share. Our price per share through thismodel came out to be about $14.54 for January 2007. We then grew thisnumber to June 2007 in the amount of $15.33.This amount definitely shows that J. C. Penney is overvalued. Within oursensitivity analysis, by manipulating the numbers, J. C. Penney was, for the mostpart, overvalued no matter if we increased growth of equity, return on equity, orcut cost of equity. The only way our firm could be fairly valued would be togrow our return on equity to about 21 percent which does not seem feasiblesince the trend shows that we are decreasing to smaller percentages. Overall,the sensitivity analysis helps confirm that our company is overvalued by thisvaluation method.Abnormal Earnings Growth ModelAbnormal earnings growth model brings theory to the price earnings ratio.It links the capitalized forward earnings and the extra value created fromabnormal earnings growth. The main difference between this model and theothers is this one discounts back to year one instead of year zero and it keeps aconstant perpetuity. This is a very accurate model and can be proven because itis linked directly to residual income. Following is the sensitivity analysis anddiscussion of the abnormal earnings growth model in respect to J. C. Penney.122
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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
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Pension Expense/SG&APension Expense
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Below is a chart of all expense man
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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 116 and 117: amount in the eye’s of shareholde
Page 118 and 119: This particular stock price in our
Page 120 and 121: esidual income or converge. Future
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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J. C. Penney Company, Inc. Equity Valuation and Analysis As of ...

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