Application of Valuation Methods to Georgia-Pacific Group

APPLICATION OF VALUATION METHODS TO GEORGIA -PACIFIC GROUP (GP)

The P/E Approach

You will need to look at the Value Line Investment Survey Report to apply the P/E approach. Assume Georgia-Pacific Group achieves the EPS that Value Line is currently projecting for the 2003-2005 period. Further assume that by 2003-2005, Georgia-Pacific Group stock will be selling at a P/E equal to the "Average Annualized P/E ratio" estimated for the 2003-2005 period.

(a) At what price would GP sell during the 2000-2005 period?
(b) Suppose you want to earn a 10 percent return on an investment in GP stock. Would you buy at its current selling price (Go to the Yahoo Finance Web site to get a quote) if you thought you could sell it in five years for the price calculated in (a) and you expected to receive an average annual dividend of 60 cents per share? Explain. Show the variables you entered in your calculator (or from the time value of money tables if you are using them) to arrive at a decision

The Dividends and Earnings Approach (Present Value Approach)

Use the capital asset pricing model to determine the required return that an investor might seek on an investment in GP. For the risk free rate, use the current rate on 91 day Treasury bills quoted at the Bureau of the Public Debt Web site. Assume the return expected on the market is 10 percent. The beta for GP can be obtained at the Yahoo Finance Web site (Get a quote and click on "Profile").
Apply the dividends and earnings approach using the required rate of return you calculated in #1; assume the dividend you will receive from GP over each of the next five years will be 60 cents, and the price at which you think you will be able to sell the stock five years from now is an average of the high and low Value Line is projecting over the 2003-2005 period.
Based on your result in #2, would you buy GP stock if it was priced at the current price obtained earlier from the Yahoo Finance Web site? Why or why not?

The Internal Rate of Return (IRR)

Calculate the IRR GP stock would provide you if you received a dividend of 60 cents per year and you were able to sell the stock at the end of five years at a price equal to the average of the high and low Value Line is projecting over the 2003-2005 period. Would you buy the stock, assuming that your required rate of return was equal to the percentage calculated in #1 under the "Dividends and Earnings Approach (Present Value Approach)?" Explain you logic.

The Dividend Valuation Model

To determine the variables to be used in the dividend valuation model, follow these steps:

Use the dividend that Value Line thinks GP will declare for next year as the numerator. The figure can be found on the "Dividends Declared Per Share" line in the statistical array on the report.
For the required rate of return, use the rate computed using the capital asset pricing model in #1 under "The Dividends and Earnings Approach (Present Value Approach)."
Assume that dividends will grow at a rate equal to the 5 year projected growth rate of earnings shown at the Yahoo Finance Web site. (Get a quote and click on "Research;" scroll down the resulting page to find the 5 year projected growth rate.)

Use the dividend valuation model to value GP. Based on your result, would you buy GP at the current market price obtained earlier from the Yahoo Finance Web site? Explain..