Project 2 – BA 3303 Equity Valuation with Method of Comparables (Ratio Based) Background Previously, you have performed a financial ratio analysis on Black and Decker and Hewlitt Packard to assess liquidity, operating efficiency, profitability and capital structure issues. The current assignment requires valuing these companies using the method of comparables (market based financial ratios). Required: 1. Identify the relevant competitors (by industry and product) for HPQ and BDK. 2. Value HPQ and BDK using the following ratios for fiscal year end 2005 and 2004 (i.e. the last two years). Remember, HPQ is a 31 October Fiscal Year end and BDK is a December 31 fiscal year end firm. Thus, you should pull up the stock prices based on those dates. 3. Valuation Models to Use: a. P/E (trailing) b. P/E (forecast) c. P/B (Market to Book value of Equity) d. D/P (Annual dividend per share/Price per share) e. P.E.G. (Price/Earnings) / (1-Year ahead Earnings Growth Rate) f. (Enterprise Value)/EBITDA Enterprise Value = MVE + Book Value of Liabilities – Cash Items 4. Make sure to clearly compute and show details of Industry Average for each ratio measure. Write-up Requirements (on a company by company basis) 1. Discuss what firms you chose as comparable by industry and products/services. Why did you choose the firms for the basis of computing industry averages? 2. For the six required valuation ratios, assess whether your firm was over-valued, under- valued or fairly valued as at the valuation date. 3. Put in a summary table of the resulting valuations for each year for all ratios. 4. Discuss whether any of the valuation methods out-perform the others in terms of accurately computing the price (closest to observed price) 5. Overall, what do the valuation ratios suggest about the value of BDK and HPQ? 6. Discuss and limitations or problems regarding the valuation methods. The above six items should take no more than 2-3 pages per company. Appendix Present detailed spreadsheets showing your computations and results.
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