Approaches to common stock valuation

Endrias Kassa

Bachelor's thesis

Abstract:

This bachelor thesis employed absolute valuation methods on Microsoft and other companies in order to determine their relative value. Hence, absolute valuation will employ the Free Cash Flow to Firm and Equity models, whereas relative valuation would employ multiples. The conclusion of the top-down strategy was a profitability study using ROE, ROA, and Net Profit Margin. For the fiscal year 2021, Microsoft's ROE was 43%, reflecting a high return on shareholders' capital. Microsoft's return on assets for the fiscal year 2021 was an impressive 18%, indicating that the company is benefitting from its holdings. Microsoft's net profit margin for the fiscal year 2021 was 36.45%, indicating good profitability and cost management. The approach begins with absolute valuations using Discounted Cash Flow models. Essential input elements for evaluating the intrinsic value of Free Cash Flow to Firm and Equity have been found. The first use involved a two-stage growth model with a five-year projected horizon (from 2022 to 2026). The discount rate was 9.6% based on 0.90 levered betas. Beta, the volatility of a stock compared to the market and the average industry beta of internationally comparable companies, should range from 0.8 to 2.0 for a stable company. Debt repayments lower an equity company's worth. FCFF valued the selected business. Microsoft Corp. shares are valued at 325.49 USD, which is 29% over their current market price. So, buy or hold this stock. Microsoft's P/E ratio is below the industry average, indicating that the market expects Microsoft will grow at a slower rate than its competitors. It may also indicate that the company is undervalued, offering investors an opportunity to purchase. Alphabet was the greatest option because its P/B ratio was the lowest. A company's ratios may be influenced by market and financial considerations. Rather than relying just on the P/E, P/B, or P/S ratio, investors should examine the financial and industry performance of a firm before investing. Due to the fact that each organization may do an in-depth analysis, the chosen topic has excellent growth potential. Due to volume limits, this thesis cannot fully utilize top-down basic analysis. It is a significant step toward a comprehensive system of stock valuation. It would be fascinating to compare the author's conclusions to such a comprehensive equity investigation.

Keywords

Present Value, Fundamental Analysis, Absolute Valuation, Relative Valuation, Discounted Cash flow

Language used: English

Date on which the thesis was submitted / produced: 29. 4. 2023

Thesis defence

• Date of defence: 25. 5. 2023
• Supervisor: Ing. Jana Kalabisová, Ph.D.
• Reader: Petr Wawrosz, Ph.D.

Czech University of Life Sciences Prague

Faculty of Economics and Management

Bachelor programme / field:
Economics and Management / Economics and Management