Security Analysis and Business Valuation on Wall Street,: A ... - lib

International Stocks 347EXHIBIT 26.2 Rate of Return Calculation, Honda Motor ADRs, April 2009Step 1: Determine US$ Cash FlowsFor Year Ending March 31ActualProjectedHonda Results 2008 2009 2010 2011 2012Earnings per share (yen) Y330 Y102 Y47 Y170 Y260Dividends per share (yen) 70 25 10 40 65Yen/US$ exchange rate — 98:1 97:1 96:1 95:1US$ Cash FlowsDividends — $0.26 $0.10 $0.42 $ 0.68Sale price — — — — 43.80US$ cash flows — $0.26 $0.10 $0.42 $44.48Discounted at 13 percent a — $0.23 $0.08 $0.29 $27.28Terminal value calculation bSale price = (EPS × 2012 P/E multiple) ÷ exchange rateSale price = (Y260 × 16) ÷ 95Sale price = US$43.80Step 2: Compare Present Value to Current Market PriceA. Present value of ADR = $0.23 + $0.08 + $0.29 + $27.28= US$27.88B. Market price of ADR = US$25.90ConclusionThe present value of Honda Motor ADRs is 8 percent higher than the market price. Thedifference falls within the 15 percent margin of safety, so no action is taken.One ADR represents one Honda share.a The discount rate reflects Honda’s beta (versus the Tokyo stock index) <strong>and</strong> U.S. indexes.b The terminal P/E corresponds to a long-term average.For large <strong>and</strong> small stocks, the U.S. institution completes projections in the issuer’slocal currency. It then translates the dividend flow <strong>and</strong> terminal value into U.S.dollars at the forecast exchange rate. The resulting net present value (NPV) showsthe institution’s estimated return in U.S. dollars, which remains its base performancemetric. An example for Honda Motor appears as Exhibit 26.2.Discount Rates—Developed CountryAs Chapter 14 described, one way for determining the discount rate for the presentvalue of a U.S. stock is the capital asset pricing model (CAPM), whereby:k U.S. = R F + β(R M − R F )