Assignment

Target Corp

The analysis associated with the two parts of the assignment needs to include:

1. Explanation of the Variables Used in the DCF Valuation - Explain and justify all of the variables used in the DCF valuation. These would include, but are not limited to, the growth rates, capitalization structure, cost of capital components, WACC, etc.

2. Explanation and Interpretation of DCF Valuation Results - Explain the results of the DCF analysis. This should include an analysis of any difference between the results of the DCF analysis and the current stock price.

3. Explanation of the Data Used for the EVA Analysis and Interpretation of Results - Present the results of the EVA analysis and explain what they mean. The analysis should discuss future EVA results and what variables can affect those results either positively or negatively.

4. Explanation of the Data Used for the MVA Analysis and Interpretation of Results - Present the results of the MVA analysis and explain what they mean. The analysis should explain a discussion of future MVA results and what variables can affect those results either positively or negatively.

Writing Instructions

The discussion portion of the analysis should be three to five pages in length, double spaced, and should employ APA style and format for reference citations. Supporting data (e.g., figures, tables, etc.) and references should be submitted limited to four separate attachments in an appendix after the written portion of the paper.

The paper should begin with a short introduction and then proceed to examine the four topics outlined in the previous section.

The subheadings used in the paper should be:

1. Introduction
2. Explanation of the Variables Used in the DCF Valuation
3. Explanation and Interpretation of DCF Valuation Results
(Including comparison and explanation of differences between the current stock price and results of the DCF valuation.)
4. Explanation of the Data Used for the EVA Analysis and Interpretation of Results
5. Explanation of the Data Used for the MVA Analysis and Interpretation of Results

USING EVAL FOR THE DCF STOCK VALUATION

To proceed with the Discounted Cash Flow valuation of the company, it will be necessary to update (and carefully explain) the Valuation Parameters in eVal. There is a separate worksheet titled "Valuation Parameters" (tab at the bottom of eVal Excel program).

1. It will be necessary to estimate the cost of equity capital. For that estimate, use the CAPM. Today, the risk free rate is around 2% to 3%. The equity risk premium should be between 5% and 6% (the historical average). To complete the estimate, find the beta of the stock (e.g., Yahoo Finance).

2. Let the value of contingent claims on common equity remain at 0.

3. Use today's date for the date of the valuation.

4. Let the value of the dilution factor for splits remain at 1.0.

5. For the cost of net debt use either the average cost of outstanding debt or use an estimate of what you think it would cost to issue new debt. Explain the assumption.

6. Enter the cost of preferred stock if any is outstanding, otherwise enter 0%.

7. For the cost of minority interest use the same percentage as you use for the WACC.

8. The model instructs you to adjust the WACC so that the two equity values are approximately equal.

ESTIMATED PRICE PER SHARE

The estimated price per share (intrinsic value) then appears in the Green-coded cell at the top of the worksheet.

WHAT TO DO IF ESTIMATED STOCK PRICE IS SIGNIFICANTLY DIFFERENT FROM CURRENT STOCK PRICE

If you find that the estimated stock price is unreasonable and can't be explained adequately, then you may want to adjust some of the forecasting assumptions that were used in developing the initial forecast.