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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

Estimating Exxon Mobil Corporation's Intrinsic Stock Value

Use online resources to work on this chapter's questions. Please note that website information changes over time, and these changes may limit your ability to answer some of these questions.

In this chapter, we described the various factors that influence stock prices and the approaches that analysts use to estimate a stock’s intrinsic value. By comparing these intrinsic value estimates to the current price, an investor can assess whether it makes sense to buy or sell a particular stock. Stocks trading at a price far below their estimated intrinsic values may be good candidates for purchase, whereas stocks trading at prices far in excess of their intrinsic value may be good stocks to avoid or sell Although estimating a stock's intrinsic value is a complex exercise that requires reliable data and good judgment, we can use the Internet to find financial data in order to arrive at a quick "back-of-the- envelope" calculation of intrinsic value.

7. The required return on equity. rs is the final input needed to estimate intrinsic value For our purposes, urn can assume a number (say, 9% or 10%) or you can use the CAFM to calculate an estimate of the cost of equity, using the data available on the Internet. (For mow details, look at the Taking a Closer look exercise for Chapter 8.) Having decided on your best estimates for D1 rs and g, you can calculate XOM's intrinsic value. Be careful to make sure that the long-run growth rate is less than the required rate of return. How does this estimate compare with the current stock price? Does your preliminary analysis suggest that XDM is undervalued or overvalued? Explain.

Summary Introduction

To calculate: The current intrinsic value per share of the company and whether this suggests that the company is undervalued or overvalued.

Introduction:

Stock Price: It refers to the price of a single share of a company in the share market. The trading of shares of a company takes place in the share market. It provides the value of the company in the market in terms of total value of their share capital.

Explanation

Given information:

Current dividend per share is $3.06 (refer the previous question).

Growth rate in dividends of the company per year is 5%.

Rate of returns on equity is 9%.

The formula to calculate current intrinsic value per share is,

P0=D0×(1+g)rg

Where,

  • P0 is the current intrinsic value per share of the company.
  • D0 is the dividend per share.
  • r is the rate of return on equity.
  • g is the growth rate on dividend per year.

Substitute $3.06 for D0 , 9% for r and 5% for g.

P0=$3

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