KMBSolution5 - Kimberly-Clark Corporation (KMB) Solution to...

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Kimberly-Clark Corporation (KMB) Solution to Continuing Case, Chapter 5 CONVERTING ANALYSTS’ FORECASTS TO A VALUATION Obtaining analysts’ forecasts Thomson Financial’s I/B/E/S data base provides forecasts that sell-side analysts make on a regular basis, and these forecasts are published on a number of finance web sites. The Continuing Case in Chapter 1 gave you an excerpt from the Yahoo! Finance website covering Kimberly Clark. An important summary number for analysts’ expectations is their consensus forecast (an average). This in given for the forward year and the following year for most companies, and often a 3-5 year eps growth rate is also supplied. From Chapter 1, the consensus eps forecasts for KMB for 2005 and 2006, made in March 2005, are: 2005 2006 Earnings per share 3.81 4.14 Indicated dividend per share 1.80 The indicated dps is the dividend that analysts are expecting for the forward year. The traded P/B KMB’s maket (traded) P/B in March 2005 was calculated in Chapter 3: 4.72. To remind you, this is the market price of $64.81 divided by the book value per share of $13.73. It is this P/B ratio that we wish to challenge. Should we pay 4.72 times book value for KMB? The valuation There are two valuations below. The required return for equity in both cases is the 8.9% we calculated using the CAPM in the Case for Chapter 3. 1. First we calculate the value based on only two years of analysts’ forecasts and then apply a growth rate of 4% after 2006. Required Return 8.9% 2005 2006 Eps 3.81 4.14 Dps 1.80 1.96 Bps 13.73 15.74 17.92 ROCE 27.7% 26.3%
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RE 2.59 2.74 Discount factor 1.089 1.186 PV of RE 2.38 2.31 Total PV of RE 4.69 RE growth rate (g) 4.0% Continuing value 58.13 PV of CV 49.02 Value per share 67.44 Continuing value (CV) =
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This note was uploaded on 10/07/2010 for the course ECTCS ec12947322 taught by Professor Johnathayeri during the Spring '10 term at Life.

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KMBSolution5 - Kimberly-Clark Corporation (KMB) Solution to...

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