KimberlyClark Corporation (KMB)
Solution to Continuing Case, Chapter 6
CONVERTING ANALYSTS’ FORECASTS TO A VALAUTION
The traded P/E
Forward P/E = $64.81/$3.81 = 17.0
Trailing P/E = ($64.81 + $1.60)/$3.64 = 18.2
(this was calculated in the Chapter 3
solution)
The valuation
Following the scheme for the valuation in Chapter 5, there are two valuations below.
1. First we calculate the value based on only two years of analysts’ forecasts and then
apply a growth rate of 4% after 2006. We use the 8.9% required return that we calculated
in Chapter 3.
Required Return
8.9%
2005
2006
Dps
1.80
1.96
Eps
3.81
4.14
Dps reinvested
0.160
Cumdividend earnings
(eps+dps reinvested)
4.300
Normal Earnings
4.149
Abnormal Earnings Growth
(AEG)
0.151
AEG Growth Rate (g)
0.04
Continuing value
3.084
PV of continuing value
3.084
Total
6.894
Capitalization rate
0.089
Value per share
77.46
The formula for this calculation is

+
=
04
.
1
089
.
1
1511
.
0
81
.
3
089
.
0
1
2004
E
V
= $77.46
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View Full DocumentThe intrinsic forward P/E = $77.46/$3.81 = 20.3
2. Now incorporate analysts’ 5year growth forecasts into the valuation. Eps below are
growing at 8% after 2006 and dps forecasts are those we used in the Chapter 5 Case.
Required Return
8.9%
2005
2006
2007
2008
2009
Dps
1.80
1.96
2.14
2.33
2.54
Eps
3.81
4.14
4.47
4.83
5.22
Dps reinvested
0.160
0.174 0.190 0.209
Cumdividend earnings
(eps+dps reinvested)
4.300
4.644 5.020 5.427
Normal Earnings
4.149
4.508 4.868 5.260
Abnormal Earnings Growth
(AEG)
0.151
0.136 0.152
0.167
Discount factor
1.0890
1.186 1.291 1.406
PV of AEG
0.139
0.115 0.118 0.119
Total PV of AEG
0.491
AEG Growth Rate (g)
0.04
Continuing value
3.544
PV of continuing value
2.521
Total
6.822
Capitalization rate
0.089
Value per share
76.65
The continuing value (CV) =
04
.
1
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 Spring '10
 johnathayeri
 P/E ratio, Implied volatility, AEG, Basic financial concepts

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