Module Five
Qian Wang
Southern New Hampshire University
FIN-340: Fundamental Investments
Professor Fernando Patterson, Ph.D
Jun 4, 2022
II. Stock Analysis:
Symbol Estimated Dividends Beta
Earnings
Sales
Free Cash Flow
5-Year Average Average Free Dividend Industry Industry Cash Growth P/E P/S Ratio Flow Ratio Growth 13.7 23.7 1.12 2.60%
IBM
0.86
6.56
6.35
78.43
16.17
KO
0.66
1.76
2.25
8.96
2.59
8.3
22.6
2.2
6.50%
ORCL
1.1
1.28 N/A
4.55
14.33
2.37
21.1
20.5
4.45
10% N/A
NFLX
1.57
11.24
65.23
0.29
N/A
52.5
6
AKAM
1.34
N/A
2.96
20.88
4.27
N/A
41.8
3.58
17%
The dividend value model calculates the present value of a firm's stock based on the dividend
it pays. It usually works for stable and foreseeable dividends. Expected Return = Risk-Free Rate
+ Beta*(Expected Return of Market -- Risk-Free Rate)
A.Value of IBM
Based on IBM's recent years of irregular dividend patterns but with the overall upward trend
of increasing its dividend. Thus, the free cash flow valuation method is being used. Free Cash
Flow to Equity= [ Present Value Free Cash Flow/ Expected Market]/ Numbers of Shares
Outstanding
Value of IBM = 15767/0.09/889 = $197. 06
Expected Return= 0.75%+0.86*(9%- 0.75%) =7.85%
B. Value of Coke-Cola
Based on the Coke-Cola financial report, the company has been showing consistency in its
dividend growth. Also, the company is expecting to continue increasing its dividend as well. In
this case, the Constand-Growth Dividend Value Method is being used. The formula is Value of a
share of stock = Next year's Dividends / [Required rate of return -- Dividend Growth Rate]
Value of Coke-Cola= 1.76*(1+0.083)/ (0.09-0.083) = $190.61
Expected Return= 0.75% + 0.66*(9%-0.75%) = 6.2%
C. Value of ORCL
ORCL has consistently grown its dividends, the company has a very high 5-year dividend
growth which is 21.1. Yet, its free cash flow growth rate is higher than the market return. Hence,
Price to Multiple Earnings is being used. The formula is Price to Multiple Earnings = EPS *
Industry Average P/E Ratio.
Value of ORCL= 4.55*20.5=$93.28
Expected Return= 0.75% + 1.1*(9%-0.75%) = 9.83%
D. Value of NFLX
NFLX does not pay dividends and still is a growing company. Based on the recent 5 years of
growth, it shows an upwards trend. Therefore, Price to Multiple Earnings is being used.
Value of NFLX= 11.24*52.5=$590.1
Expected Return= 0.75% + 1.57 (9%-0.75%) = 13.7%
E. Value of AKAM
AKAM does not pay dividends but with a really high free cash flow growth. By looking at
recent years' cash flow, there are few negative free cash flows. According to research, " The free
cash flow model cannot be used since the firm has a negative free cash flow per share" (Kimball
& Shapiro, 2018). For this reason, the Price-to-Sale is being used. The formula = Stock Price/
Sales per Share
Value of AKAM= 117.04/20.88=5.61
Expected return = 0.75% + 1.34 (9%-0.75%) = 11.81%
III. Portfolio Development