I projected financial statements for xxx for Years +1 through +5, computed required rate of return on equity and WACC, and estimated share value based on the DIV, FCF, RI and market multiples valuation approaches. Assume that the risk-free interest rate is 3.0% and the market risk premium is 6.0%. xxx has x million shares outstanding at the end of year x. At the start of Year +1, xxx’ share price was $x. I conducted sensitivity analysis, varying key valuation parameters and assessing the effects on share value. The price differential is x% of its risk-neutral value, representing the percentage amount that the market has discounted its shares for risk. Reverse engineering its share price at the end of year x to solve for the implied expected rate of return yields x%. I determine this by assuming that value equals price and that earnings and long-run growth forecasts through Year +6 and beyond are reliable proxies for the market’s expectations. I compared my value estimate to xxx’ share price, VB to MB and VE to PE to determine an investment recommendation(buy/sell/hold).
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