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

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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
This value of the perpetuity then needed to be brought back to year one fromyear ten. We did this by multiplying by the present value factor of year ten. Wethen summed the core earnings, which are the forecasted earnings in 2007, plusthe perpetuity present value and the sum of the present value of abnormalearnings growth. To find our value of equity, we took this sum and divided bythe J. C. Penney’s cost of equity. Finally, we took our number of sharesoutstanding at present time and divided it into our value of equity to come upwith our estimated price per share of $22.88 adjusted to June 1, 2007.During our sensitivity analysis, we used aggressive negative growth ratesto attempt to reach our current share price. We were only successful in reachinga fairly valued share price by cutting cost of equity to .05 and having a growthrate of -50 percent. This proves along with our other models that J. C. Penney isextremely overvalued since we couldn’t achieve a fairly valued price because wedo not believe J. C. Penney could cut cost of equity to .05 and growth of -50percent is not achievable.Abnormal Earnings Growth and Residual Income Proof2008 2009 2010 2011 2012 2013 2014 2015 2016Annual AEG -71.72 -77.50 -83.63 -87.29 -94.18 -101.47 -106.12 -114.32 -123.01Change in RI -71.72 -77.50 -83.63 -87.29 -94.18 -101.47 -106.12 -114.32 -123.01As mentioned previously, the abnormal earnings growth and residualincome models are linked. If one were to take the change in residual incomefrom 2008 to 2007, the result would be the annual abnormal earnings growthfrom 2008. The chart above illustrates this for our forecasted years up to 2016.This can help verify that the valuation models are correctly calculated.Because of this link, the abnormal earnings growth and residual incomevaluation share price should be very close. Our models came up with prices thatwere about nine dollars apart. After reviewing our numbers, we looked carefullyat the perpetuity and realized that was where our numbers differed. The reason124
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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
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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 122 and 123: To find our long run return on equi
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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