The company you are analyzing is UPS (symbol UPS). Assume you are doing this analysis on January 1, 2014, so that the latest information you have available is the 2013 annual report.
You may use financial sites on the internet or Morningstar for your financial data. If you use a website other than the company's website, make sure it is bona fide financial resource.
At the company's website you can pull up the 2013 Annual Report, which contains the 10-K. You will find everything you need in the Financial Summary, the Income Statement, the Balance Sheet, and the Statement of Cash Flows. Use the data for 12/31/13 (and 12/31/12, if needed). [Go to UPS.com. At the very bottom of the page you'll see a link labeled "Investors". Click on that. On the next page on the left-hand side you'll see "Tool Kit". Click on "Investor Packet". Then click on "Annual Report".
1. Describe this company and its main business(es). [One page].
2. Create a 10-year graph of this company's stock price using Excel. Use month-end prices. Weekly is also acceptable. Copy the image to your project.
3. Find the company's 6-year dividend history. You need this to calculate a dividend growth rate for the company through the end of 2013. Do your calculations based on the annual amount of dividends paid.
4. Calculate Intrinsic Value using the Constant Growth DDM; Show all of your work.
a. Estimate a dividend growth rate you believe is justified for this company using the dividend history you found in Instruction (3). HINT: Calculate the growth rate for the five years ended December 2013.
b. Determine what you believe is your required rate of return to invest in this stock (the "k").
c. Using the formula from class, calculate the Intrinsic Value. Show all of your work!
d. Using an Excel spreadsheet, create a Sensitivity Analysis (Intrinsic Value) table for this company. Use discount rates from 5% to 15%, with 1% increments. Use growth rates of 0% to 12% with 2% increments. Copy this Excel table into your project.
e. From the Sensitivity Analysis, show me all of the calculations that would give you the intrinsic values for this cell in the table: 8% discount rate and 6% growth rate.
5. Calculate Intrinsic Value using the Multi-Stage Dividend Model; Show all of your work.
a. Calculate a dividend growth rate for the company using the retention ratio technique. Show all of your work! This will be the dividend growth rate for the first stage, which will be for two years.
b. Using the first stage growth rate calculated in 5(a) for two years, and the dividend growth rate you estimated in 4(a) above as the second (perpetual) growth rate, and the discount rate you determined in 4(b), construct a 2-stage dividend discount model to come up with the intrinsic value for this company. Show all of your work!
6. Calculate Intrinsic Value using the Free Cash Flow to the Firm model:
a. Calculate the company's current Free Cash Flow using the formula used in class and the data from the Annual Report/10-k. Show your work!
b. Using the Constant Growth Model, the growth rate you estimated in 4(a), and the discount rate determined in 4(b), calculate the present value of the company. Show your work!
c. Using the information from the Annual Report/10-K, complete the Intrinsic Value calculation for this methodology. Show your work!
7. Calculate the company's Free Cash Flow Yield and current Dividend Yield. Show all of your work!
8. You are the Wall Street equity analyst. Given the company's 12/31/2013 stock price (which you must find), and using your answers from above, determine whether you would recommend a BUY or SELL on this stock. Give your estimated target price, and explain your answer in ½ to 1 page.
9. Assume that your clients already own the stock at $95.00 per share; would you BUY MORE, HOLD, or SELL? Explain your answer in one paragraph.