Black and Decker Forecasts Research Paper

Pages: 5 (1271 words)  ·  Bibliography Sources: 1  ·  File: .docx  ·  Level: Master's  ·  Topic: Economics

SAMPLE EXCERPT . . .

There are no major changes expected with respect to the company's solvency or liquidity ratios. The figures show that the performance of the company is expected to improve over the next five years. If strong growth overseas continues, and the long-term growth in the U.S. housing market materializes as expected, both the return on assets and the return on equity should improve steadily over this time period, making the gains resulting from the merger more apparent on the company's financial statements.

Valuation

The current market cap for the company is $12.97 billion, based on a share price of $76.86. This price is near the top of the company's 52-week range. The first step in determining the appropriate valuation for the company is to determine a discount rate for the cash flows associated with the company. The cost of equity is determined using the capital asset pricing model (CAPM). The risk-free rate is 0.27%, equivalent to the 2-year Treasury rate. The market risk premium is assumed to be 7%. The beta for Black & Decker is 1.48. Thus, the cost of equity is:

(0.27)+ (1.48)(7) = 10.63%

The cost of debt is equivalent to the interest paid divided by the level of debt, so 3.9% (140 / 3526). The after-tax cost of debt is 3.53%, based on the tax rate of 9.42%. The weight of debt is 57.5% and the weight of equity is 42.5%. The weighted-average cost of capital therefore is as follows:

(.575)(3.53) + (.425)(10.63) = 2.03 + 4.51 = 6.54%

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This is then used to discount back the dividends in the dividend discount model to derive an appropriate price for the company's stock. The current dividend is $1.96 per share. The dividend growth rate over the past two years has been a steady 9%. This is going to be the estimate of the dividend growth rate going forward, given that the company is expected to see its profitability, and in particular its return on equity, improve over that period. Using the dividend growth rate, the valuation for Black & Decker is:

P = 1.96 / (-.1063-.09) = $120.02

TOPIC: Research Paper on Black & Decker Forecasts Since Assignment

This analysis shows that the stock is undervalued on the market today. There are a number of possible explanations for this. The expected growth rate in the dividend might be lower than 9%. While this rate has held for two years, the expectation might be that the combination entity will begin to retain more income in order to fuel growth if there is a rebound in the U.S. housing market. There could also be higher expectations for capital growth, implying that the cost of equity is lower than the market expectation for growth in the coming years. This would be particularly true of the trend in the company's volatility was increasing, something that would imply a higher cost of equity. In either case, the present analysis indicates that Black & Decker might be undervalued even at its present high levels.

Solvency

Black & Decker is a solvent company, given the stability in its capital structure, and both the current ratio and times interest earned figures. There is no reason to believe that the company is going to have any imminent financial difficulty.

Conclusion

Black & Decker's merger with Stanley should be deemed a success. The company has, since the merger, been able to grow revenues and to improve margins by containing the selling, general and administrative costs. The result is that the company is expected to see continued improvement over the coming five years in all of its major metrics. Positive forecasts for the U.S. housing market -- a key macroeconomic indicator for this company -- only strengthen the case that the company is going to continue to experience superior outcomes in the coming years.

The company's valuation is significantly… [END OF PREVIEW] . . . READ MORE

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"Black and Decker Forecasts."  Essaytown.com.  January 30, 2013.  Accessed September 25, 2021.
https://www.essaytown.com/subjects/paper/black-decker-forecasts-since/6373926.