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

for this large difference between share prices is that our residual incomeperpetuity had no variation after 2011. Tying this back to what was mentionedabove, the change in residual income should equal the annual abnormal earningsgrowth. Since our residual income is a fixed number, the abnormal earningsgrowth after 2011 would be zero if we followed that rule. This is a limitationbecause of the nature of the perpetuity and it is not likely that our abnormalearnings growth would become zero.This large difference between the two valuation share prices will becomesmaller as the perpetuity goes on to infinity. We set up our sensitivity analysiscost of equity and growth rates the same to be able to compare. We usedaggressive growth rates all the way up to -50 percent to attempt to reach a smalldifference between the two prices. We were able to close the gap to about threedollars. Overall, this proves that the share price valuations are closely relatedbesides limitations within the perpetuities.ConclusionAfter looking at all theoretical valuation models, we believe that J. C.Penney is overvalued at its June 1, 2007 share price of $81.99. Even though thedividend model shows the company as overvalued, we have determined that thisparticular model is irrelevant in the case of our company due to the fact that theshare price moved as low at $10.18 and as high as $587.81. The drasticfluctuations in share price were a definite indicator that the model is not useful inour case. The J. C. Penney Company, according to all of the sensitivity analysis’conclusions, is overvalued anywhere from $40.00-$55.00 at June 1, 2007.125