1. This question is based on the Excel file DCF analysis.xlsx
a. Assume that free cash flow grows at a constant rate of 6% per year from 2019 on, calculate the current value of operations (as of 12/31/2015). Assume that this company’s WACC is 10.5%.
b. Calculate the intrinsic value per share of common equity as of 12/31/2015.
2. Calculate the intrinsic value of Caterpillar’s stock price per share using MV/BV ratio and P/E ratio. Determine whether Caterpillar is potentially “overvalued” or “undervalued.”
a. Identify four industry peers. Please prepare a table that briefly describes the business of Caterpillar and each of the industry peers to demonstrate that they are in fact comparable.
b. Calculate MV/BV ratio and P/E ratio for all industry peers. Please show your work by showing market value, book value, price per share, and earnings per share for each company. Also remember to provide dates for all values. For example, market value is as of date xxx, book value is as of date yyy (e.g., March 31, 2015), etc.
c. Based on your calculation in b, what do you think should be Caterpillar’s MV/BV ratio and P/E ratio?
d. Calculate intrinsic value for Caterpillar’s stock per share based on your answer in part c.
e. Does it appear that Caterpillar is “overvalued” or “undervalued?”
f. Is your answer in part e sufficient for you make a recommendation as to whether to buy or sell this company? What are some of the possible “complicating factors / further considerations?”