FIN32 - Financial Management - Forecast Future (annual) Sales - Earnings Before Interest And Taxes - Net Working Capital - Finance Assignment Help

Assignment Task:

As a new junior analyst for a large brokerage firm, your first assignment is to analyze Johnson & Johnson stock. Your boss recommends determining prices based on both the discounted free cash flow valuation method and the comparable P/E ratio method. 
1. Go to Reuters and enter the symbol for Johnson & Johnson (JNJ) in the “Search Reuters” box, then select Johnson and Johnson. From the main page for JNJ, click “OVERVIEW” tab, gather the following information, and enter it into a spreadsheet: 
a. The current stock price 
b. The EPS (TTM, which means ‘trailing twelve months’) 
c. The number of shares outstanding 
d. The industry P/E ratio (TTM) 
2. Click the “ANALYSTS” tab. On the Analyst page, scroll down to find the LT (Long-Term) Growth Rate and enter it into your spreadsheet. (Feel free to choose one of the ‘Mean’, ‘High’, ‘Low’, or ‘1 Year Ago’ value.) This is the sales growth rate projection for the upcoming 5 years. 
3. Go to Yahoo Finance and type “JNJ” into the “Search” box. Under “FINANCIALS” of JNJ, choose “Income Statement” and “Annual Data” frequency. Copy and paste the most recent three years’ worth of the following data items into your Excel file. 
a. Total Revenue 
b. Earnings Before Interest And Taxes 
c. Income Before Tax 
d. Income Tax Expense 
4. Now choose “Cash Flow” statement and “Annual Data” frequency, and repeat the same process for the three years’ worth of the following cash flow statement items: 
a. Depreciation 
b. Capital Expenditures (*Note that this item is listed as minus value to indicate it is cash outflows. Therefore, use the absolute value for the ‘size’ of capital expenditures.) 
5. Now choose “Balance Sheet” and “Annual Data” frequency, and repeat the same process for the three years’ worth of the following balance sheet items: 
a. Total Current Assets 
b. Total Current Liabilities 
c. Short/Current Long Term Debt 
d. Long Term Debt 
e. Cash And Cash Equivalents 
6. To determine the stock value based on the discounted free cash flow method: 
a. Based on the historical data from the financial statements downloaded from Yahoo Finance, compute the following ratios for each of the three years and take the average: 
i. EBIT-to-sales ratio (=Earnings Before Interest And Taxes/Total Revenue) 
ii. Tax rate (=Income Tax Expenses/Income Before Tax) 
iii. Depreciation-to-sales ratio (=Depreciation/ Total Revenue) 
iv. Capex-to-sales ratio (=Capita Expenditures/Total Revenue) 
v. NWC-to-sales ratio (=[Total Current Assets–Total Current Liabilities]/ Total Revenue) 
b. Forecast future (annual) sales for the next five years, starting from the most recent year’s Total Revenue (Sales0) growing at the 5-year growth rate obtained from Reuter (in Question 2) for each of the next five years. 
c. Use the average ratios computed in part (a) to forecast the following items for each of the next five years: 
i. EBIT (=Total Revenue each year × EBIT-to-sales ratio) 
ii. EBIT× (1-t) (=EBIT each year× (1- Tax rate)) 
iii. Depreciation (=Total Revenue each year × Depreciation-to-sales ratio) 
iv. Capital expenditures (=Total Revenue each year × Capex-to-sales ratio ) 
v. Net working capital (=Total Revenue each year × NWC-to-sales ratio) 
vi. Increase in net working capital (=this year’s NWC − previous year’s NWC) 

d. Forecast the free cash flow for each of the next five years using the free cash flow equation. 

7. To calculate an estimate of JNJ’s stock price based on a comparable P/E ratio, multiply the industry average P/E ratio by JNJ’s EPS. 

8. Compare the stock prices produced by the two methods to the actual stock price. Explain to your boss why the estimates from the two valuation methods may differ. Specifically, address the assumptions implicit in the models themselves as well as the assumptions you made in preparing your analysis. 

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