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

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Residual Income Model WACC(AT) 0.0728 Kd 0.0332 Ke 0.13610 1 2 3 4 5 6 7 8 9 10 112006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Earnings 1266 1342 1422 1508 1598 1694 1796 1903 2018 2139Dividends 181 181 181 202 202 202 224 224 224 224 247.82Book Value Equity 4288 5373 6534 7775 9082 10478 11970 13542 15221 17014 18928Cash From Operations $1,414 $1,498 $1,588 $1,684 $1,785 $1,892 $2,005 $2,125 $2,253 $2,388Cash Investments -260 -272 -289 -307 -326 -346 -367 -390 -414 -439 -439Actual Earnings 1266 1342 1422 1508 1598 1694 1796 1903 2018 2139"Normal" (Benchmark) Earnings 584 731 889 1058 1236 1426 1629 1843 2072 2316Residual Income (Annual) 682 611 533 449 362 268 166 60 -54 -177 -308PV Factor 0.8802 0.7748 0.6819 0.6003 0.5283 0.4651 0.4093 0.3603 0.3171 0.2791PV of Annual Residual Income 601 473 363 270 191 125 68 22 -17 -49Total PV of Annual Residual Income 2046 81%Continuing (Terminal) ValuePerpetuity 0% Sensitivity Analysis Growth RatePV of Terminal Value Perpetuity -632 -25% 0 -0.15 -0.25 -0.4 -0.5Initial Book Value of Equity 4288 170% 0.05 127.8 78.08 72.55 68.87 67.53Estimated Price per Share (Jan2007)$25.23 100% 0.07 79.18 60.3 57.55 55.62 54.98Implied Share Price at June 1, $200726.61 Ke 0.09 53.73 47.22 46.07 45.22 44.9Observed Share Price (June 1,2007) $81.99 $94.29 $69.69 0.11 38.62 37.45 37.21 37.02 36.95Initial Cost of Equity 0.1361 over under 0.1361 26.61 28.15 28.52 28.81 28.93Perpetuity Growth Rate (g) 0-2263.04147
AEG ModelWACC(AT) 0.0728 Kd 0.0332 Ke 0.13610 1 2 3 4 5 6 7 8 9 10 112006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Earnings 1266 1342 1422 1508 1598 1694 1796 1903 2018 2139Dividends 181 181 181 202 202 202 224 224 224 224 247.82Book Value of Equity 4288Core Perpetuity Component 1266Forecast Earnings 1342 1422 1508 1598 1694 1796 1903 2018 2139Drip Income 24.61 24.61 24.61 27.44 27.44 27.44 30.52 30.52 30.52Cumulative Dividend Income 1366.39 1446.89 1532.23 1625.52 1721.40 1823.04 1933.86 2048.07 2169.12"Normal" Annual Income(Benchmark) 1438.11 1524.40 1615.86 1712.81 1815.58 1924.52 2039.99 2162.39 2292.13Annual AEG -71.72 -77.50 -83.63 -87.29 -94.18 -101.47 -106.12 -114.32 -123.01 -131PV Factor 0.880 0.775 0.682 0.600 0.528 0.465 0.409 0.360 0.317PV AEG (Annual) -63.13 -60.05 -57.03 -52.40 -49.76 -47.19 -43.44 -41.19 -39.01Total PV of AEG -453.20Value of AEG Perpetuity Sensitivity Analysis Growth Rates-457.88Present Value of AEG Perp + to Core -145.21 0 -0.15 -0.25 -0.4 -0.5Total Adjusted T+1 Perpetuity 667 0.05 47.35 62.29 65.8 68.61 69.75Capitalization Rate (Ke) 0.1361 0.07 33.82 44.49 47 49.01 49.82Value of Equity 4903.91 Ke 0.09 26.31 34.61 36.56 38.12 38.75Estimated Price per Share (Jan 2007) 21.70 0.11 21.52 28.31 29.91 31.19 31.7Implied Share Price June 1 ,2007 22.88 0.1361 17.4 22.88 24.17 25.21 25.62Observed Share Price $81.99 94.2885 69.6915Perpetuity Growth Rate (g) -0.15 over underAEG=RIProofWACC(AT) 0.0728 Kd 0.0332 Ke 0.13612008 2009 2010 2011 2012 2013 2014 2015 2016Annual AEGChange in RI-71.72 -77.50 -83.63-71.72 -77.50 -83.63-87.29-87.29-94.18-94.18-101.47-101.47-106.12-106.12-114.32-114.32-123.01-123.01148
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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
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paying off their short-term obligat
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ecause many firms in this segment o
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Penney’s inventory turnover is in
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ConclusionAnalysis through liquidit
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operating efficiency because the fi
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Return on AssetsReturn on Assets0.1
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Capital Structure AnalysisWhen look
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however, in 2006, J. C. Penney show
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Sustainable Growth RateSustainable
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average of only years 2005 and 2006
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(reported in millions)Annual Income
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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 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 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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