To determine the stock value using the discounted cash flow method:
Forecast the free cash flows. Start by using the historical data from the financial statements downloaded from Morningstar to compute the three-year average of the following ratios:
Tax Rate (income tax expense/income before tax)
Property, plant & equipment/Sales
Depreciation/property, plant & equipment
Net working capital/sales
Create an empty timeline for the next five years
Forecast future sales based on the most recent years total revenue growing at the LT growth rate (5Y average) from Reuters for the first five years of the forecast.
Use the average ratios from step 5. a. above to forecast EBIT, property plant & equipment, depreciation, and net working capital for the next five years.
Forecast the the free cash flow for the next five years using Eq. 10.2 from the text (Section 10.1 in text).
Determine the horizon enterprise value for year 5 using Eq. 10.6 and a long-term growth rate of 4% and a cost of capital of 11% for JNJ.
Determine the enterprise value of the firm as the present value of the free cash flows.
Determine the stock price using Eq. 10.4. Note: your enterprise value is in thousands of dollars and the number of shares outstanding Is in billions.
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