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

Sensitivity AnalysisGrowth Rates0 -0.15 -0.25 -0.4 -0.50.05 47.35 62.29 65.8 68.61 69.750.07 33.82 44.49 47.00 49.01 49.82K e 0.09 26.31 34.61 36.56 38.12 38.750.11 21.52 28.31 29.91 31.19 31.700.1361 17.40 22.88 24.17 25.21 25.62Undervalued $94.29 Actual PPS (June 1, 2007): $81.99We first had to calculate the cumulative dividend income by addingforecasted earnings to our drip income. Drip income is found by multiplying theprevious year’s dividend by our cost of equity. Once the cumulative dividendincome is found, we needed to calculate the normal income, “benchmark”, bytaking the previous year’s earnings times one plus J. C. Penney’s cost of equitywhich is 13.61 percent. To find the annual AEG, which links our residual incomemodel to our AEG model, we take the cumulative dividend income minus thecalculated benchmark. We then had to bring back these values to year one bymultiplying by the present value factor. The present value factor is calculated bytaking one divided by one plus the cost of equity to the previous time period.Once the present values of our annual AEG components were found, we addedall of these together to get the total present value of the abnormal earningsgrowth, -453.20.We then had to find the value of the perpetuity to account for the yearsout to infinity. To do this, we forecasted an abnormal earnings growth for yeareleven that followed our pattern of abnormal earnings growth. This value cameto be -131 million. We then plugged it into the perpetuity equation:AEG Perpetuity = forecasted AEG/(JCP K e - growth)123