Discussion of Dvm, Peg Ratio, P.E Ratio with Examples from Kelloggs
Analysis of the Kellogg’s organisation and discussion of the modelling methods used
Introduction
Below is a financial report analysing whether the Kellogg’s company (K) is worthy of investment. To do this I will examine their historical data and financial information; then from these, make calculations and model the company’s situation (This information report was obtained from http://uk.finance.yahoo.com). After calculating the models I will be able to compare them with the actual stock price and other information of their competitors. This essay will outline both the strengths and weaknesses of each of the models used, and how they apply to Kellogg’s. I will be particularly focusing on: Beta Calculations, Dividends Valuation Model (DVM), Price to Earnings ratio (P.E Ratio), PEG Ratio and Cash flow methods.
Kellogg’s is a major producer of cereal and convenience foods, with their brands including cookies, crackers, toaster pastries and cereal bars. Kellogg’s products are manufactured in 18 countries and marketed in more than 180 around the world. The global headquarters are located in Michigan, USA, while their largest factory in Manchester.
Kellogg’s trades on the New York Stock Exchange under the ticker symbol NYSE: K, while its market capitalisation is 18.72billion and has 357 million issued shares.
Valuing the share price
Dividend Valuation Model (DVM)
The dividend valuation model is based on the fact that the market value of the ordinary shares represents the sum of the expected dividend flows discounted to present value. The model works on the premise that the shareholder will expect two different types of return: income from dividends and a capital gain from the future sale of the share for an inflated price.
If we assume that the dividends do not change over time we can use the following formula.
[pic]
Unlike this model, most companies will not have a fixed dividend; theirs will grow year on year. The growth rate of a
Introduction
Below is a financial report analysing whether the Kellogg’s company (K) is worthy of investment. To do this I will examine their historical data and financial information; then from these, make calculations and model the company’s situation (This information report was obtained from http://uk.finance.yahoo.com). After calculating the models I will be able to compare them with the actual stock price and other information of their competitors. This essay will outline both the strengths and weaknesses of each of the models used, and how they apply to Kellogg’s. I will be particularly focusing on: Beta Calculations, Dividends Valuation Model (DVM), Price to Earnings ratio (P.E Ratio), PEG Ratio and Cash flow methods.
Kellogg’s is a major producer of cereal and convenience foods, with their brands including cookies, crackers, toaster pastries and cereal bars. Kellogg’s products are manufactured in 18 countries and marketed in more than 180 around the world. The global headquarters are located in Michigan, USA, while their largest factory in Manchester.
Kellogg’s trades on the New York Stock Exchange under the ticker symbol NYSE: K, while its market capitalisation is 18.72billion and has 357 million issued shares.
Valuing the share price
Dividend Valuation Model (DVM)
The dividend valuation model is based on the fact that the market value of the ordinary shares represents the sum of the expected dividend flows discounted to present value. The model works on the premise that the shareholder will expect two different types of return: income from dividends and a capital gain from the future sale of the share for an inflated price.
If we assume that the dividends do not change over time we can use the following formula.
[pic]
Unlike this model, most companies will not have a fixed dividend; theirs will grow year on year. The growth rate of a
References: Alford, A. (1992). Blackwell Publishing. The Effect of the Set of Comparable Firms on the , 94-108. Beaver, W., & Morse, D. (1978). What Determines price-earnings ratio. CFA Institute , 65-76. Gehr, A. (1992). A Bias in Dividend Discount Models. Financial Analysts Journal, Vol. 48, , 75-80. Kaplan, S., & Ruback, R. (1994). THE VALUATION OF CASH FLOW FORECASTS: AN EMPIRICAL ANALYSIS. NBER WORKING PAPER SERIES. Ruback, R. (2002). Capital Cash Flows: A Simple Approach to valuing risky cash flows. Financial Management, Vol. 31 , 85-103. (http://uk.finance.yahoo.com/q/is?s=K&annual, 2012) (http://research.stlouisfed.org/fred2/series/GS10?cid=115, 2012)