Answer the following questions(Finance)

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Questions

Suggested Questions
1. Valuation using the DDM
1.1. Financial analysts believe that Volkswagen will increase its dividends at an annual rate of 3%.
Use the Dividend Discount Model (DDM) to estimate the value of Volkswagen stock for different discount rates (e.g. covering a range from 5.50% to 10.00%: 5.50%, 5.75%, 6.00%, etc.).
How sensitive is the valuation to the discount rate?
1.2. At what annual rate would dividends have to grow in the long term to justify paying €250 per share for Volkswagen stock? (Note: Use a discount rate of r=7%).
Is this a sensible number? Why?
1.3. Assume that Volkswagen increases its dividends at the annual rate of g1=2% over the period 2009-2015 and at g2=5% a year on from then.
What would the value of Volkswagen stock be then?
1.4. Financial analysts expect Volkswagen to be trading at €70 per share by the end of 2013.
What would the value of Volkswagen stock be then if this forecast is correct?
How sensitive is your result to the dividend growth rate that you use? Compare your results to the long-run stock price performance (Exhibit 2 in the case).
2. Valuation using the multiple P/E ratio
2.1. Volkswagen's P/E multiple is 21, while the industry average is 7.58.
Klaus Farra is thinking about multiplying the industry P/E ratio by Volkswagen's EPS to find a fair valuation of Volkswagen's shares.
Is this the right way to proceed? Does this imply that Volkswagen is over-valued, under-valued or correctly priced in December 2008?
2.2. What should be the comparable firms' set for the P/E analysis? Think about the factors affecting your choice. [Solution by the case's authors: consider Toyota, Honda, Fiat, Renault and BMW)
2.3. What is the value of Volkswagen stock using P/E multiples valuation?
3. Valuation using the multiple EV/EBITDA ratio
3.1. What are the right companies for the comparable set in the EV/EBITDA ratio analysis?
What value do you obtain for the multiple? [Solution by the case's authors: consider Daimler, Peugeot and Renault]
3.2. What is the value of Volkswagen stock using EV/EBITDA multiples valuation?

Exhibit 5

Exhibit 5
Financial Data - December 2008
This table shows a list of financial variables of Volkswagen and its competitors in 2008 based on financial statements released by each company
Variable Volkswagen2 Toyota General Ford Daimler Honda Peugeot Fiat Renault BMW Porsche
Motors
Enterprise Value (€ billions) 133.76 151.84 24.60 86.28 73.96 54.00 26.01 22.42 30.24 63.12 17.56
BV(Debt) (€ billions) 69.38 96.90 33.48 111.28 58.64 34.88 27.93 21.38 29.14 59.53 18.17
BV(Equity) (€ billions) 35.01 94.19 -61.98 -12.45 31.22 36.06 13.14 10.35 18.96 20.27 15.07
MV(Equity) (€ billions) 77.62 73.24 1.33 3.74 25.28 27.47 2.77 5.69 4.76 14.35 9.76
Cash (€ billions) 9.47 12.92 10.11 15.86 6.91 8.34 2.10 3.46 2.05 7.45 6.99
Net Debt (€ billions) 56.14 78.60 23.27 82.54 48.68 26.54 23.25 16.73 25.48 48.77 7.79
Net Sales (€ billions) 113.81 208.63 107.17 105.23 95.87 95.25 54.36 59.38 37.79 53.20 7.47
EBITDA (€ billions) 15.71 31.54 -7.80 5.78 10.05 11.36 2.85 6.41 4.08 8.15 9.93
Net Income (€ billions) 4.75 13.63 -22.20 -10.56 1.64 4.76 -0.34 1.61 0.57 0.32 6.29
Share Price (€) 194.19 23.05 2.30 1.65 26.40 15.13 12.15 4.59 18.55 21.97 55.79
Earnings per share (EPS) (€) 11.94 4.29 -38.34 -4.65 1.71 2.62 -1.51 1.30 2.23 0.50 35.95
Dividends per share (€) 1.93 1.11 0.36 0.00 0.60 0.68 0.00 0.00 0.00 0.30 2.70
Price/Earnings 16.33x 5.37x -0.06x -0.35x 15.44x 5.77x -8.06x 3.53x 8.33x 44.30x 1.55x
Enterprise Value/EBITDA 8.52x.10 4.81x -3.15x 14.92x 7.36x 4.76x 9.13x 3.50x 7.42x 7.74x 1.77x
EBITDA/employees 43.97 99.77 -32.11 27.15 36.79 63.45 13.71 32.31 31.13 81.51 813.46
ROIC (%) 5.56% 7.08% N/A -5.33% 1.91% 6.91% -0.08% 8.23% 1.75% 0.65% 28.21%
Market Beta 0.65 0.87 0.82 0.99 1.59 NA 1.20 1.56 2.32 1.07 1.71
Number of Employees 357.207 316.121 243.000 213.000 273.216 178.960 207.800 198.348 130.985 100.041 12.202
Shares Outstanding (thousands) 398.091 3,177,445 579.000 2,272,000 957.700 1,815,356 227.614 1,239,880 256.552 653.291 175.000
2 Volkswagen share price represents the weighted average price of the ordinary share price (€250.00) and preference share price (€38.02).

Exhibit 5-Use the EV for May7th

Exhibit 5
Financial Data - December 2008
This table shows a list of financial variables of Volkswagen and its competitors in 2008 based on financial statements released by each company
Selected Financial Data for Volkswagen AG (Dec. 31, 2008):
Variable Volkswagen Toyota General Motors Ford Motor Daimler Honda Peugeot Fiat Renault BMW Porsche
Enterprise Value (€ billions) 158.59 153.13 25.26 87.37 74.67 58.62 26.14 23.15 31.06 63.14 24.72
BV(Debt) (€ billions) 69.38 96.90 33.48 111.28 58.64 34.88 27.93 21.38 29.14 59.53 18.17
BV(Equity) (€ billions) 35.01 94.19 -61.98 -12.45 31.22 36.06 13.14 10.35 18.96 20.27 15.07
MV(Equity) (€ billions) 99.56 73.24 1.33 3.74 25.28 27.47 2.77 5.69 4.76 14.35 9.76
Cash (€ billions) 9.47 12.92 10.11 15.86 6.91 8.34 2.10 3.46 2.05 7.45 6.99
Net Debt (€ billions) 56.14 78.60 23.27 82.54 48.68 26.54 23.25 16.73 25.48 48.77 7.79
Net Sales (€ billions) 113.81 208.63 107.17 105.23 95.87 95.25 54.36 59.38 37.79 53.20 7.47
EBITDA (€ billions) 15.71 31.54 -7.80 5.78 10.05 11.36 2.85 6.41 4.08 8.15 9.93
Net Income (€ billions) 4.75 13.63 -22.20 -10.56 1.64 4.76 -0.34 1.61 0.57 0.32 6.29
Share Price (€) 250.10 23.05 2.30 1.65 26.40 15.13 12.15 4.59 18.55 21.97 55.79
Earnings per share (EPS) (€) 11.94 4.29 -38.34 -4.65 1.71 2.62 -1.51 1.30 2.23 0.50 35.95
Dividends per share (€) 1.93 1.11 0.36 0.00 0.60 0.68 0.00 0.00 0.00 0.30 2.70
Price/Earnings 20.95 5.37 -0.06 -0.35 15.44 5.77 -8.06 3.53 8.33 44.30 1.55
Enterprise Value/EBITDA 10.10 4.86 -3.24 15.11 7.43 5.16 9.17 3.61 7.62 7.74 2.49
EBITDA/employees 43.97 99.77 -32.11 27.15 36.79 63.45 13.71 32.31 31.13 81.51 813.46
ROIC (%) 5.56% 7.08% N/A -5.33% 1.91% 6.91% -0.08% 8.23% 1.75% 0.65% 28.21%
Market Beta 0.65 0.87 0.82 0.99 1.59 NA 1.20 1.56 2.32 1.07 1.71
Number of Employees 357,207 316,121 243,000 213,000 273,216 178,960 207,800 198,348 130,985 100,041 12,202
Shares Outstanding (thousands) 398,091 3,177,445 579,000 2,272,000 957,700 1,815,356 227,614 1,239,880 256,552 653,291 175,000

Exhibit 6

Exhibit 6
Financial Snapshot – May 7, 2009
This table shows a list of financial variables of Volkswagen and its competitors on May 7, 2009 based on financial statements and financial analysts’ forecasts
Variable Volkswagen3 Toyota General Ford Motor Daimler Honda Peugeot Fiat Renault BMW Porsche
Motors
Share Price (€) 181.20 30.45 1.19 4.52 27.57 23.36 17.88 7.47 26.72 27.91 46.99
EPS - Actual - Dec 2008 11.94 4.29 -38.34 -4.65 1.71 2.62 -1.51 1.30 2.23 0.50 35.95
EPS - Analyst Forecast - Dec 2009 3.99 0.79 -19.99 -1.49 -1.34 0.87 -5.94 -0.31 -9.93 0.07 7.48
EPS - Analyst Forecast - Dec 2010 5.54 1.37 -6.15 -0.24 1.37 1.29 -1.54 0.28 -1.23 1.62 5.28
EPS - Analyst Forecast - Dec 2011 7.85 NA -1.19 0.40 2.67 NA 2.57 0.65 2.87 3.24 8.16
EBITDA - Actual - Dec 2008 15.71 31.54 -7.80 5.78 10.05 11.36 2.85 6.41 4.08 8.15 9.93
EBITDA - Analyst Forecast - Dec 2009 13.95 7.30 N/A 4.98 7.99 4.40 3.13 4.90 3.10 6.30 -0.24
EBITDA - Analyst Forecast - Dec 2010 10.33 10.15 N/A N/A 7.04 5.00 3.09 4.36 2.79 6.65 1.63
3 Volkswagen share price represents the weighted average price of the ordinary share price (€229.44) and preference share price (€46.22).