The Dow Chemical Company: Free Cash Flow to the Firm

Prospective Analysis on the forecasted stock valuation of the Dow Chemical company

Forecasting. The forecasted financial performance of Dow Chemicals, Limited is depicted in the report. In relation to the assessment of business analysis between 2014 and 2018, a prospective examination on the value of the company is relevant for assessing the perspective financial performance of the business. The company uses the following assumption in predicting the value of the stock price in the future.

Projecting the asset turnover ratio

Dow Chemicals, Limited has an assorted venture in dissimilar countries and as a result, the expenditure of the business enterprise is high enough to recover hence leading to small profits to the company (Damodaran 35). Sales by the asset are inclined while the expenditure is higher. So, the standard ratio is less implying that the assets ratio of the company will get better on the asset ratio. In mitigating for risks, the business should assure that the speculation assessment would give profits to the company within a short period of time.

Sales Forecast

From the data analysis, there is an increasing growth rate in sales. This means that the company will have stable returns in the future and thus the projection of the company’s future stocks value would be easy to create. Some of the factors vital in ascertaining the value of the company are the rate of returns depicted by the steadiness of sales revenue (Jones 245). A good projection should have an increasing forecast rather than a fixed return since the constant projection will be susceptible to threat of external factors such as inflation or entries of a new product into the market. The organizational structure of the company determines the reputation of the business since a good structure would lead to a good investment decision that will bring in returns to this company.

Growth rate assumption

The assumption laid down in ascertaining the company anticipated free cash flows for the next six years, that is, a standard approach is to project the income growth for a period of six years (Damodaran n.pag.). This is achieved by classifying the after-tax proceeds for the projected time, the anticipated capital expenditure, as well as the working capital of the company. Some of the key drivers for projecting the company’s sales growth are: assessing the probability of the market expansion or contraction, and the manner in which the stock in the security market is performing. The corporation should assess whether a new product is in the market or the selling price is forthcoming, since this will affect the growth rate and steadiness of the sales revenue and the income as well. Due to uncertainty, the company should consider multiple variable factors that would affect the achievability of the anticipated sales revenue.

Net capital expenditure

The relative valuation is an approach for estimating the value of the company’s assets by appraising the assets with the same assessed property in the market. Having a peer group assessment on the similar asset in the market and translating the same asset into an identical price to a major statistics is a vital method of the relative valuation because assessment of the complete price is difficult to perform.

The value of the company is also determined using the enterprise’s value approach such as the earnings before interest and tax (EBITT). Thus, this method discloses the evaluation of the company’s capital structure separately (Jones 245). From the above data analysis on the discounted cash flow of the company, there is an increasing rate in earning before interest and tax. This signifies that the value of the company will increase in the near future.

The management

The management will add some value to the company since the employment of skilful and competent employees would mean that the quality of work is enhanced as well as employees will know what is expected of them. This will ease administration of the employee’s behavior at the work place (Fabozzi 272). To meet the expected return and improved value to the company, a manager should understand and become accustomed to the changing environment. Consequently, a good management would be first in adapting to the latest changes in business that might bring positive effects to the company operation. This, therefore, signifies that skilful management adds value to the company.

Returns on investment

This ratio indicates the return generated on utilization of total assets. The above ratio analysis depicts a return of 2% from the net asset envisaged. So, it implies that for every 100 USD of total assets of the company, 2 USD was generated as return. This amount is too small for a return to finance the company as well as to satisfy the shareholders’ wealth. Obviously, the management should improve on the rate of return on investment because the company is spending more on investment for a less return.

Valuation. In measuring the predictable worth of the business, the model of a free cash flow is deemed pertinent because the models are in agreement with the prospect projection and reproduce a superior value of the stock price, as well as give an enhanced approach on the corporation’s undertakings (Damodaran 35). The free cash flow assumes the NOPAT and NOA, the cost of business capital and forecast the company’s prospect proceeds, and the technique in which the business is going to attain return on venture. The growth prototype in free cash flow can be commented since it can be practical that a stable enhancement in growth will be attained within the next five years of projection.

Sensitivity Analysis. In ascertaining whether to buy or sell the shares, a lot of factors need to be taken into consideration since investing in risky projects would mean incurring additional treat of business failure or success. As a result, it would mitigate for such risks when the sensitivity analysis test is done on the forecasted stock value. There is growth in the value of stock in the future financial periods as depicted by the intrinsic value of the shares in performing the sensitivity analysis and the current market per shares. According to Damodaran, an undervaluation of the company’s share exists where investors will pay less (29.7 USD per share) as compared to the intrinsic value that is worth (43.3 USD per share) (25). Therefore, investors should consider buying the shares in the company, as they will earn returns from their investment into the company’s stock.

A growth rate in revenue as forecasted ought to increase to 50.6 USD. The company must be warned of the threat to its business success. The loss of probable customers might happen if the company’s stock value turns down. The net profit margin is important for the net operating profit after tax. As a result, the profit margin is sustained at the similar worth as in 2012, the stock value would be inferior in contrast to the predicted performance. the increase in the cost of equity to 13.5% would mean an increment in the price of stock to 29.7 USD leading to an increase in abdominal earning. Since Dow Chemicals, Limited is a mature corporation, a stable development in the asset turnover will be envisaged.

Report on the forecasted stock valuation of Dow Chemicals, Limited

Discounted Cash flow statement ($ 000)

Dec 2014 Dec 2015 Dec 2016 Dec 2017 Dec 2018
Sales 59018.76 62482.99 66538.41 70821.88 74958.64
NOPAT 6287.478 6679.394 7139.744 7627.789 8100.853
Tax shield 95.4 286.8 578 3034 4250
Net earning 6382.878 6966.194 7717.744 10661.79 12350.85
P.V.I.F 12%- 0.8929 0.7972 0.7118 0.6355 0.5674
Cash flow 29,311.43 21,065 30,911.52 30,633.8 7,008,03
Total cash flow 118,921.75
Outstanding shares 4000
Value of stock $ 29.7 / shares
Market value $ 43.03 / share

Market price per share = 3,011.0 – (340.0) / 62.069649= $43.03 per share

Sensitivity Analysis Test

Sensitivity test Share Price (AE) ($) Share Price (Sensitivity)($)
Sales growth rate 13% 43.03 48.62
17.6% 43.03 50.6
Profit Margin 16% 43.03 50
18.7% 43.03 51.08
Asset turnover ratio 44.09 43.03 62
62.63 43.03 89.58
Cost of equity 12% 43.03 48.2
13.5% 43.03 48.8
CAPM
Risk free rate 2.81%
Marker risk premium 5.75%
Beta 1.86
Cost of equity 13,5 %
WACC BOOK VALUE WEIGHT
Debt 18,882 82.5%
Equity 4,000 17.5%
Total value 22,882 100%
Cost of equity 13,5 %
Cost of debt 6%
Tax rate 30%
WACC 9.92%

Works Cited

Damodaran, Aswath. Investment Valuation: Tools and Techniques for Determining. London: John Wiley & Sons, 2012. Print.

Fabozzi, Frank. The Handbook of Financial Instruments.London: John Wiley & Sons, 2003. Print.

Jones, Charles. Investments: Analysis and Management. London: John Wiley & Sons, 2012. Print.