Healthy Products, Inc (Essay Sample)

Healthy Products, Inc
An evaluation of Fiber Cereals, Inc. as Healthy Products, Inc. is planning to have a joint venture with it. This valuation is geared towards obtaining the value of common stock of Fiber Cereal, Inc. The company is not listed (it si a privately traded company). Therefore, the share value is not determined by the market mechanism. The market mechanism obeys the law of demand and supply and the buyers and sellers of the share determine the price of the share. To calculate the value of a share, various methods are used. These methods are the Capital Asset Pricing Model, the earnings and price earnings ratio and the Dividend Growth Model.
Answers,
* Valuation of the stock based on the dividend valuation model.
Ke = D1+gP + g
Where; Ke, Cost of capita/ Expected rate of return
D, Dividend at the end of the year.
P, Market share price of the share
G, Expected growth
P= D/ (Ke-g)
= $1.35 / (.14- .11) = $45
* Indicating that the value computed in part a, is correct by showing value of D1, D2< and D3 and discounting each at 14%.
D1. = $1.35
D2= 111% × $ 1.35 = $1.4985
D3= 111% × $ 1.4985= $ 1.6633
Discounting the dividends to their present values using the rate of 14%
Year

Dividends
($)

Discounting factor at 14%

Net Present Value ($)

1

1.35

0.8772

1.1842

2

1.4985

0.7695

1.1531

3

1.6633

0.6750

1.1227

Total



3.4600

P3= D4Ke-g
D4= D3(1+g)
D4= 1.6633 (1+0.11) = $1.8463
P3= $1.8463/ (0.14-0.11) = $61.54
Discounting this expected stock price to present value at 14% rate. The discounting factor at year 3 is 0.6750.
The discounted price will be= $61.54×0.6750= $41.54
Adding this value to the discounted values of dividends value, we get
$41.54+ 3.4600 = $45.00
Therefore, these workings have shown that the value is correct.
* Value of Fiber Cereals based on the P/E ratio approach.
Average market P/E ratio= (14+16+15+23+17)/5= 17
Stock value= P/E ratio × earnings per share
= 17×$2.50 = $42.5
The P/E ratio approach gives a slightly lower stock value ($42.5) as compared to the dividend model $45.00).
* If in computing the industry average P/E, I decided to weigh Kellogg by 40% and other firms by 15 %, then, the new weighted average industry P/E will be as computed in the table below:
Company

P/E ratio

Weights (%)

Weighted P/E ratio

Del Monte...