Jorge is a sell-side analyst for Wells Fargo and covers the oil and gas industry. Based on his experience, he believes the appropriate way to model the intrinsic value of companies in this industry is the following weighted average: 60% dividend discount model, 25% P/E multiple, and 15% P/Sales multiple. He has the following information at his disposal in his attempt to value LIND industries. For FY 19, LIND has $300M of assets and $250M liabilities. LIND had $200M in sales, paid taxes of $10M and interest on its debt of $5M. SG&A costs were $30M and depreciation amounted to half of the SG&A costs. The cost of goods sold was 60% of sales. LIND has 400,000 share outstanding. The appropriate discount rate for LIND is 9%. Jorge expects them to issue dividends of $11, $17, and $25 in exactly 1 year, 2 years, and 3 years, respectively. After that, Jorge expects dividends to increase by 6% per year indefinitely. Jorge notes that the average P/E ratio for those in the oil and gas industry is 10, average P/Book ratio is 2 and the average P/Sales ratio is 2.5, but because LIND has favorable growth opportunities he believes they deserve a 15% premium on both of these. What is Jorge’s intrinsic value of LIND stock? Vanessa agrees with all of Jorge’s assumptions, but disagrees with his model. Her model is as follows: 35% dividend discount model, 25% P/Book ratio, 20% P / E ratio, and 20% P/sales ratio. She also only believes LIND deserves a 5% premium. What is her intrinsic value of LIND stock? Troy buys the research of both Jorge and Vanessa and decides to buy a stock if it meets the following criteria: 1) OPM (OP/Sales) > 15%, 2) NIM (NI/Sales) > 5%, 3) market price is 10% above the average of Jorge and Vanessa’s estimate. If market price is 700$, does Troy buy stock?

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter7: Valuation Of Stocks And Corporations

Section: Chapter Questions

Problem 1hM

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1) Jorge is a sell-side analyst for Wells Fargo and covers the oil and gas industry. Based on his experience, he believes the appropriate way to model the intrinsic value of companies in this industry is the following weighted average: 60% dividend discount model, 25% P/E multiple, and 15% P/Sales multiple. He has the following information at his disposal in his attempt to value LIND industries. For FY 19, LIND has $300M of assets and $250M liabilities. LIND had $200M in sales, paid taxes of $10M and interest on its debt of $5M. SG&A costs were $30M and depreciation amounted to half of the SG&A costs. The cost of goods sold was 60% of sales. LIND has 400,000 share outstanding. The appropriate discount rate for LIND is 9%. Jorge expects them to issue dividends of $11, $17, and $25 in exactly 1 year, 2 years, and 3 years, respectively. After that, Jorge expects dividends to increase by 6% per year indefinitely. Jorge notes that the average P/E ratio for those in the oil and gas industry is 10, average P/Book ratio is 2 and the average P/Sales ratio is 2.5, but because LIND has favorable growth opportunities he believes they deserve a 15% premium on both of these. What is Jorge’s intrinsic value of LIND stock? Vanessa agrees with all of Jorge’s assumptions, but disagrees with his model. Her model is as follows: 35% dividend discount model, 25% P/Book ratio, 20% P / E ratio, and 20% P/sales ratio. She also only believes LIND deserves a 5% premium. What is her intrinsic value of LIND stock? Troy buys the research of both Jorge and Vanessa and decides to buy a stock if it meets the following criteria: 1) OPM (OP/Sales) > 15%, 2) NIM (NI/Sales) > 5%, 3) market price is 10% above the average of Jorge and Vanessa’s estimate. If market price is 700$, does Troy buy stock?

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