Stock Price Valuation

Transcription

1 Stock Price Valuation A Case study in Dividend Discount models & Free Cash Flow to Equity models Master s thesis within Finance Authors: Anders Karlsson Niklas Josefsson Tutor: Urban Österlund Jönköping

2 Master s Thesis within Finance Title: Authors: Tutor: Stock Price Valuation Anders Karlsson and Niklas Josefsson Urban Österlund Date: Subject terms: Valuation of stock price, Valuation Models, Case Study Abstract Purpose Method The purpose of this study is to investigate how much the result will differ when calculating stock price for firms when using DDM model compared to FCFE. We will also like to find out if there is a specific payout ratio where DDM works better than FCFE and how accurate are DDM and FCFE model when used to value different companies. This is a qualitative study where the collection of our empirical data will be retrieved from the theoretical framework and precious research. In the stock price valuation area there are many sources of information, however the focus to gain information in the subject where on non-fiction books. We also looked at suggested reading and reference lists from relevant working papers, books and articles. Empirical Findings In this section we present our findings from the valuation of the 10 companies. We analyze and present our data together with assumptions made for every company. After this an extended analysis is presented, the purpose of this section is to get a better understanding from our results in the empirical findings and to analyze the data even more. Conclusion We concluded that the results differ a lot from use of the two different valuations models and that they work better in different situations. Also, none of the two models are very accurate when valuating a specific company, there are too many unknown parameters that can affect the result. However, in the research we saw that there is a tendency for FCFE model to work better with companies with low dividend pay-out ratio and that DDM works better on companies with high divided pay-out ratio.

3 Table of Contents 1 Introduction Background Problem Discussion Purpose Delimitation Theoretical Framework The Efficient Market Hypothesis Different types of Efficiency Discounted Cash Flow (DCF) Dividend Discount Model (DDM) Price of stock with zero growth dividends Price of stock with constant growth dividends (Gordon Growth Model) Price of stock at time N with constant growth dividends (Terminal Value) Two-stage Dividend Discount Model Three-stage Dividends Discount Model Modified Dividend Discount Model Equity Valuation Free Cash Flow to Equity Discount Models Cash to stockholders to FCFE ratio Constant Growth FCFE Model Two-stage FCFE Model Three-stage FCFE Model (E Model) Future Growth Previous Research Methodology Methodological Approach Outline of the Study The research process of the thesis Inductive vs. Deductive Qualitative vs. Quantitative Data Search Criticism of the Sources The Approach and Structure of the Thesis Validity and Reliability Validity Reliability Criticism of Method Empirical findings and Analysis Alfa Laval Assumptions Two-stage DDM Two-stage FCFE Assa Abloy i

4 4.2.1 Assumptions Two-stage DDM Two-stage FCFE Atlas Copco Assumptions Two-stage DDM Two-stage FCFE Axfood Assumptions stage DDM stage FCFE Boliden Assumptions Two-Stage DDM Two-Stage FCFE Ericsson Assumptions Two-stage DDM Two-stage FCFE H&M AB Assumptions Two-stage DDM Two-stage FCFE Holmen Assumptions Gordon Growth Model FCFE TeliaSonera Assumptions Gordon Growth Model FCFE Volvo Assumptions Gordon Growth Model FCFE Extended Analysis Conclusion Discussion and Reflections Future Studies References Appendices Appendix Appendix Appendix Appendix Appendix ii

5 Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix Appendix iii

6 Appendix Appendix Appendix Appendix Appendix Appendix Appendix Figures And Tables Figure 1 Stock Prices... 3 Figure 2 Market Efficency... 6 Figure 3 Relationship among three different information sets... 8 Figure 4 Future Growth Figure 5 The research process of the thesis Figure 6 Alfa Laval, Stock price valuation Figure 7 Assa Abloy, Stock price valuation Figure 8 Atlas Copco, Stock price valuation Figure 9 Axfood, Stock price valuation Figure 10 Boliden, Stock price valuation Figure 11 Ericsson, Stock price valuation Figure 12 H&M, Stock price valuation Figure 13 Holmen, Stock price valuation Figure 14 TeliaSonera, Stock price valuation Figure 15 Volvo, Stock price valuation Figure 16 Stock Prices Table 1 Sources used in the Study Table 2 Summarize of DDM and FCFE Valuations iv

7 1 Introduction This chapter is an introduction to the thesis. First, a background about the subject is given followed by a problem discussion with our main questions leading to the purpose of the thesis. 1.1 Background Valuation is the process of forecasting the present value of the expected payoffs to shareholders. According to Lee, C.M (1999) valuation models are merely pro form accounting systems that constitute the tools for articulating the assessment of future events typically in terms of accounting constructs. Barker, R (2001) argues that a good understanding of valuation methods requires two main things, the first is an analytical review of the models. The second is an evaluation of the data that are available for use of these models. It is because of this there is a significant relationship between the choice of valuation models and the available data. A valuation model is a mechanism that converts a set of forecasts of (or observations on) a series of company and economic variables into a forecast of market value for the company s stock. The valuation model can be considered a formalization of the relationship that is expected to exist between a set of corporate and economic factors and the market s valuation of these factors (Elton, Gruber, Brown, & Goetzmann 2011). The models that we use in valuation may be quantitative, but the inputs leave plenty of room for subjective judgments. Thus, the final value that we obtain from these models is colored by the bias that we bring into the process. In fact, in many valuations, the price gets set first and the valuation follows (Damodaran 2002) Valuation models has been an essential part in the study of finance for quite some time, and a continuous discussion is going on concerning the accuracy of different valuation models and how efficient they are in predicting future firm value. The search for the correct way to value common stocks, or even one that works, has occupied a huge amount of effort over a long period of time. Attempts have ranged from simple mechanical techniques for picking winners to hypotheses about the broad influences affecting stock prices (Elton, Gruber, Brown, & Goetzmann 2011) Casti. J (1998) mentions the simple observation, that there is no single best way to process information. This led Arthur and Holland to the not-very-surprising conclusion that deduc- 1

8 tive methods for forecasting prices are, at best, an academic fiction. As soon as you admit the possibility that not all traders in the market arrive at their forecast in the same way (more about this in the section about market efficiency), the deductive approach of classical finance theory begins to break down. So a trader must make assumptions about how other investors form expectations and how they behave. He or she must try to psyche out the market. But this leads to a world of subjective beliefs and to beliefs about those beliefs. In short, it leads to a world of induction rather than deduction. Sweden and most of the world for that matter has recently been in a deep financial recession, which most people would argue, in the writing this (spring of 2011) is over even though some still argue for the chance of a double dip and the chance of heading into a new recession. During the financial crises the discussion of the accuracy of financial models have started to increase again and with questions like; how can we say that one valuation models work better than another, when most of the models use historic data together with biased information such as, among others human interpretations, rumors about the corporation, and other external information. Further it is important to emphasize that a valuation is not timeless, quite the opposite in fact, a valuation is as mentioned above a mechanism for turning a set of historical or predicted variables to determined a possible present values for the corporation s stock. Variables as might be interpret by the name can vary, and as the inputs of the model changes the outcome that is predicted with the model will also change. This is why as mentioned the earlier after the latest financial crises in Sweden more people have come to criticize the value of valuation models. As mentioned above firm valuation is a quantitative valuation model and from that it might be logical argue that more inputs (variables) would lead to a better model with a prediction closer to the true value, but basic statistic tells us that in fact the opposite might be true. As more variables are added into a model the risk for input errors might increase, and at some point the cost will overweight the benefits of adding a variable. The problems with more complex models amplifies as the users start to not understand the importance of each variable, at some point they can become so complex that they become black boxes where analysts feed in numbers into one end and valuations emerge from the other. All too often the blame gets attached to the model rather than the analyst when a valuation fails, Damodaran (2002). 2

9 Alfa Laval Assa Abloy Atlas Copco Axfood Boliden Ericsson H&M Holmen TeliaSonera Volvo OMS Stockholm 30 Index Figure 1 Stock Prices As seen in the graph above stock price varies a lot over time and both changes from day to day to a yearly basis might be difficult to value. When using valuations as dividend discount model (DDM) and free cash flow to equity (FCFE) it is important to realize that it is usually a long term prediction for the corporation where market fluctuations would equal out. Both of this models use all future cash flows until perpetuity and then it is discounted back to today or a time of preference that could be compared with the actual price to see if the stock is undervalued or overvalued. In the graph above you can also see that the different companies that we decided to value tend to move in somewhat the same direction with some companies being less sensitive to the market and some more. In the graph above we also see the effect of the stock split that Atlas Copco did during Problem Discussion The key to successfully investing in different assets, stocks and firms lies in understanding that every asset, financial as well as real has a value. A real asset is an assets used to produce goods and services, financial assets are assets such as bonds and stocks. Any asset can be valued but some are easier to value than others, and depending on valuation method you may come up with different results (Damodaran, A. 2002) 3

10 There are a various number of different valuation methods to choose from when doing a forecast of a firm, you have both sophisticated and unsophisticated valuation methods. Sophisticated methods are based on net present value (NPV) of the financial performance of multiple future periods. Unsophisticated valuation methods are simpler methods based on the multiple of a single period s performance measure to price relative to the same measure for comparable firms (Flöstrand, P. 2006). Our use of models in this study will involve models such as Dividend Discount Model (DDM) with different growth stages and Free Cash Flow to Equity (FCFE). The dividend discount model is based upon the premise that the only cashflows received by stockholders is dividends. According to Damodaran, A (2002) even if we use the modified version of the model and treat stock buybacks as dividends there is a chance we misvalue firms that consistently return less or more than they can afford to their stockholders. In contrast the FCFE model uses a more expansive definition of cashflows to equity as the cashflows left over after meeting all financial obligations, including debt payments, and after covering capital expenditure and working capital needs. These differences in the models lead us to following questions: How will the result differ when calculating stock price for firms when using DDM compared to FCFE? Is there a specific payout ratio where DDM works better than FCFE? How accurate are DDM and FCFE model when used to value different companies? 1.3 Purpose The purpose of this study is to get an understating of how the result differs when calculating stock price for firms when using DDM model compared to FCFE. We will also like to find out if there is a specific payout ratio where DDM works better than FCFE and how accurate are DDM and FCFE model when used to value different companies. 1.4 Delimitation Limitations are necessary and important in order to keep a high quality throughout the entire thesis. Our focus will be on companies which pay out dividends, this is important since dividends are a crucial part when calculating firm s stock price. Our choice of models is Dividend Discount Model and Free Cash Flow to Equity since these models are most ap- 4

11 propriate when dealing with dividends. We also decided to limit our search of companies only to large cap on the Swedish stock exchange market. The number of companies we will evaluate will be 10, we believe that this will be enough in order to get a fair result. Furthermore, the thesis will focus on the recommendations of the literature, therefore the other areas of the valuation process will not be carried out by thorough analysis, rather assumptions and simplifications will be made. When choosing between stock A, B and C we only focus on the stock that is most traded. 5

12 2 Theoretical Framework This Chapter explains the necessary theories used to answer the problem. First, the theory of efficient markets is explained. Second the necessary investment models are explained. 2.1 The Efficient Market Hypothesis When someone refers to efficient capital markets, they mean that security prices fully reflect all available information (Elton, Gruber, Brown, & Goetzmann 2011). If this where to be hold true in the financial market there would be no use of financial valuation models to find possible mispriced securities, since all securities are valued and traded at the price reflected by all available information. Figure 2. Ross, Westerfield and Jaffe, 2008 For the hypothesis that all security prices fully reflect all available information should hold true, a necessary condition is that the cost of acquiring information and trading is zero (Elton, Gruber, Brown, & Goetzmann 2011). This clearly is not the case in the markets today even though there is and has been a clear decrease in cost both of information and trading. Figure 2 above describes the reaction to new good information in an efficient market and in an inefficient market. In an efficient market the reaction to new news is instant and no over- or under-reaction exist whatsoever. In an inefficient market however there would be two different possible responses to the new news, either the market can slowly adjust to the information or an overreaction occurs and then it will take some time for the market to adjust to the right price. 6

13 As mentioned earlier a necessary condition for market efficiency to hold true is that the cost of acquire information and trading is zero. Ross, Westerfield and Jaffe (2008) also mentions three other conditions that cause market efficiency: Rationality, independent deviations from rationality and arbitrage. Rationality is important since when new information is released in the marketplace, all investors will adjust their estimates of stock prices in a rational way. Price of a stock will also rise immediately because rational investors would see no reason to wait before trading at a new price. Theory and reality in this case goes different ways, where the theory sounds good, people tend not to act rational in all situations hence it might be too much to argue that all investors should behave rationally. The market would however still be efficient if the following scenario holds (Ross, Westerfield and Jaffe 2008). Independent Deviations from Rationality would tell us that if as many individuals were irrationally optimistic as were irrationally pessimistic prices would likely rise in a manner consistent with market efficiency. Deviations from rationality could for example happen when new information released are not clear and leaves some room for interpretation and emotions for investors. Some investors could have some positive emotions towards the corporation and its news while others have the opposite emotions. As long as the irrationalities offset each other we could have a market that is efficient even though most investors would be classified as less than fully rational. It is however arguably not realistic to assume that irrationalities offset each other immediately, instead it might be more rational to argue that if there is good news most investors would get swept away and overreact to the news just as figure 1 above shows. Even in the case of independent deviations from rationality there is an assumption that will produce market efficiency (Ross, Westerfield and Jaffe 2008). Arbitrage, assumes that there are two types of people in the market, irrational amateurs and the rational professionals. Amateurs would from time to time make irrational decisions and think that a stock is undervalued and sometimes the opposite. When the behavior of the amateurs does not cancel out and create a efficient market, the behavior of professional get important. Professionals are methodical and rational, and with thoroughly studies of the companies they find objective evidence of the true value of the stock and act thereafter pushing the prices to the true value and create an efficient market as long as the arbitrage of professionals dominates the speculation of amateurs (Ross, Westerfield and Jaffe 2008). 7

14 2.1.1 Different types of Efficiency Up to this point we have been discussing market efficiency, as being a market that directly without any delay responds to all new information, this is considered to be a strong form of market efficiency. Now two new types of efficiency are introduced, the weak and the semistrong form of efficiency. The weak form of market efficiency is when security prices already include all information found in past prices and volume. If this holds true there would be no reason to use technical analysis to find deviation in stock price. Weak form efficiency is often represented mathematically as: The random term in the formula above is there to cover new information that we at time t do not know. The random error is not predictable from earlier data hence the stock price will follow a random walk ( Ross, Westerfield and Jaffe 2008). Figure 3. Ross, Westerfield and Jaffe 8

15 The semistrong form as seen in the second to largest circle above hold a stronger definition to what is an efficient market. In the semistrong form of an efficient market all information set by past prices and volume as well as all other public information has to be included in the stock price of any given firm for it to be efficient. The strong form is the hardest way to look at a efficient market and for a market to be efficient under the strong form the same as in a semistrong form has to be true and also all private information must be reflected in the stock price even if just one person have the information. 2.2 Discounted Cash Flow (DCF) Discounted cash flow valuation is one of our main ways of approaching valuations, and according to (Damodaran, A. 2002, p. 14) DCF is the foundation on which all other approaches are built upon. In order to do relative valuation correctly we need to understand the fundamentals of discounted cash flows valuation. Moreover discounted cash flow models are based on the concept that the value of a share of stock is equal to the Present Value (PV) of the cash flow that the stockholders expects to receive from it. (Elton, E, Gruber, M, Brown, S, Goetzmann, W. 2011) Discounted cash flow valuation is a method of valuing a project, company, or asset using the concepts of the time value of money. All future cash flows are estimated and discounted to give their present values (PVs) the sum of all future cash flows, both incoming and outgoing, is the net present value (NPV), which is taken as the value or price of the cash flows in question. This section will present a result of the firm s present value as well as the value of the stock Basis for discounted cash flow valuation has its foundation in the net present value (NPV), where the value of any asset is present value of expected future cash flows that the asset generates. 9

16 Where, n = Life of the asset = Cash flow in period t r = Discount rate reflecting the riskiness of the estimated cash flows Obviously the cash flows will vary from asset to asset, the discount rate will be a function of the riskiness of the estimated cash flows, the riskier assets the higher rates and vice versa for safer projects. (Damodaran, A. 2002, p. 15) According to Neale, B & McElroy, (2004, p ) the main problems with the DCF approach centre on the key variables in the model. Can future investment levels be accurately projected? How can we measure the discount rate? Over what time should we assess value? Should we accept the current earning figure? These are all questions that are key in understanding valuation. 2.3 Dividend Discount Model (DDM) There are numbers of different discounted cash flow models one can use, however in this paper we will focus on Equity Valuation using Dividend Discount Model (DDM) and Free Cash Flow to Equity (FCFE), since we are only interested in valuing the stock price. DDM is a method for valuing the price of a stock for a company which pays out dividends, assuming that the price of a stock is equivalent to the sum of all of its future dividend payments discounted to the present value. Within this model you can use a set of different approaches such as; Price of stock with zero growth dividends Price of stock with constant growth dividends (Gordon Growth Model) Price of stock at time N with constant growth dividends (Terminal Value) Price of stock with two and three stage growth dividends 10

17 2.3.1 Price of stock with zero growth dividends Since the zero growth model assumes that the dividend always stay the same, the stock price would in that case be equal to the annual dividends divided by the Rate of Return (ROR). The stockholders can therefore expect that future earnings will be flat and there will not be any further increase in the dividends payout. In order to calculate the value of the stock for we use the formula: Where, = Dividend = Required rate of return for equity investors g = Dividend Growth Rate Price of stock with constant growth dividends (Gordon Growth Model) Using the Dividend Discount Model to value the price of the stock, we sum all the company's future dividends, which in this case is assuming to grow at a constant rate. This model works best when valuating stocks for established companies, meaning that they should have increased the dividend steadily over the years. Although the annual increase is not always the same Gordon Growth Model can be used to approximate an intrinsic value of the stock. This is the least sophisticated of the DDM, but there are still some important aspects that is needed to be considered, as mentioned before the growth has to be stable which could be difficult to determined for some companies. Important is also to realize the importance of growth in all DDM s, since small variations in growth will make a large impact on the value. Where, = Next year s dividend 11

18 = Required rate of return for equity investors g = Dividend Growth Rate Further it is important to recognize that growth cannot exceed the market capitalization rate. If dividends were expected to grow forever at a rate faster than k, the value of the stock would be infinite (Bodie, Z, Kane, A, Marcus, A. 2008). It might be nonsensical, but, in reality this occurs often for companies in the real market especially for firms that are in a period of high growth, usually this growth settles down after a period of time to a more normalized growth, more about this in chapter 2.6. When the company that is being valued is experiencing a growth rate higher than the discount rate there are two ways to handle it so the DDM would be effective. First, the growth could be considered as a long term average or a normal growth rate. This is a far from a satisfactory way to handle the problem, since the rapid growth often occurs the early stage of the life cycle and the value computed when using a average growth will highly underestimate the near future dividends. Alternatively, the growth could be segmented into different stages of the financial cycle, and each of these stages could be valued separately, this is being explained more detail later (Pike, R & Neale, B. 2003) Price of stock at time N with constant growth dividends (Terminal Value) According to Damodaran, A (2002) many companies grow very rapidly in its first few years and then subsequently settling down to a constant growth rate. In this case we have to consider both the initial hyper growth stage and then the subsequent constant growth stage in order to value the price of the stock of a company. The constant growth stage is similar to the Gordon growth model where we value the price of a constant growth stock. Where, = Price (terminal value) at end of year n = Expected dividends per share in year n ( = Cost of Equity (st: Stable growth period) 12

19 = Steady state growth rate forever after year n Two-stage Dividend Discount Model As mentioned above companies tend to initially grow very rapidly in its first few years and then subsequently settling down to a constant growth rate, however to value the stock price of a company with non-constant growth increases the difficulty, one way is to assume that the company instead have a two stage growth. Where, = Stock price at time=0 = Expected dividends per share in year t = Cost of Equity (hg: High Growth period; st: Stable growth period) = Price (terminal value) at end of year n g = Extraordinary growth rate for the first n years = Steady state growth rate forever after year n Two-stage DDM is better suited than Gordon growth model for companies that has not yet reached a state of steady growth, but it far from a perfect way to value stock price. First there are now two different growths to be considered, we have the high growth stage which could be difficult to determine since the growth can vary heavily from year to year. Then the constant growth rate has to be determined for the perpetuity. Second, you have to determine for how many years the high-growth phase will continue before the firm will enter into a steady state. Third the two-stage DDM implies that the growth would abruptly end and that the company would then immediately enter a constant growth state, more realistic would be that this transition would happen over a longer period of time. 13

20 2.3.5 Three-stage Dividends Discount Model When a firm is in a three stage it is first assumed to be in an extraordinary growth phase currently, this extraordinary growth is expected to last for an initial period that has to specified. After this the growth rate declines linearly over the transition period to a stable growth rate. Here we use the following formula: Where, = Stock price at time=0 = Expected dividends per share in year t = Growth rate in high growth phase (lasts for n1 periods) = Steady state growth rate forever after year n = Payout ratio in high growth phase = Payout ratio in stable growth phase = Cost of Equity (hg: High Growth phase; t: transition phase; st: Stable growth phase) Three-stage DDM is superior to the two-stage DDM in the way that there is a transaction phase where you can account for the time it takes to go from a initial high growth phase to a normal growth. With the extra input there is also some negative aspects, as mentioned before it s difficult to determined for how long the initial high grow phase will continue this is still a problem in the three-stage model but know there is also the aspect of determine how long the decline from high- to low-growth will take but also how the decline will occur. The decline can occur in a number of ways with the easiest to use arguably being a straight line decline. The difficulties in determine the length of the high growth phase and the transaction period together with determining in what whey de decline will happen affects the accuracy of the prediction. A decision has to be made whether the addition will add to get a more precise value or in fact decline the accuracy of the prediction. 14

21 A problem with all dividend-based valuations are that they apply the assumption that there is a informative relationship between current dividends and future dividends, this might hold true in most cases, but in theory it might not. The biggest fundamental problem with the dividend-based valuation however might be that they do not address the determinants of dividend growth. Dividend-based models have no explanation between current dividends and future dividends, Barker, R (2001) Modified Dividend Discount Model When using DDM your focus is strictly on dividends paid as the only cash returned to stockholders, this exposes us to the risk that we might be missing significant cash returned to stockholders in the form of stock buybacks Damodaran, A (2002). The simplest way to incorporate stock buybacks into a dividend discount model is to add them on the dividends and compute a modified payout ratio: Modified dividend payout ratio = It is important to have in mind that the he resulting ratio for any one year can be skewed by the fact that buybacks unlike dividends are smoothed out, a much better estimate of the modified payout is therefore by looking at the average value over a period. In addition, firms may sometimes buy back stocks as a way of increasing financial leverage, we could adjust for this by netting out new debt issues. Modified dividend payout ratio = By adjusting the payout ratio to include stock buybacks will have effects on the estimated growth and terminal value. Damodaran, A (2002) By using following formula you calculate the modified growth rate: Modified growth rate = (1-Modified payout ratio) * Return on equity 15

22 2.4 Equity Valuation The value of equity is obtained by discounting expected cash flows to equity such as the residual cash flows after meeting all expenses, reinvestment need, tax obligation and net payments, at the cost of equity i.e. the rate of return (ROR) required by equity investors in the firm. (Damodaran, A. 2002, p. 17) Where, = Cost of Equity = Expeted Cash flow to Equity in period t 2.5 Free Cash Flow to Equity Discount Models Cash to stockholders to FCFE ratio The Cash to stockholders to FCFE ratio shows how much of the cash available to be paid out to stockholders in the firm that is actually paid out to them, in form of dividends and stock repurchases. (Damodaran, A. 2002) A value of 1 would imply that the firm is returning all the available cash after meeting its expenses to the owners. Therefore a value below 1 means that the firm is not paying out all that they can afford, and keep some of it in the firm, reasons for this could be amongst others to reinvest it in positive net present value project, increase cash balance and future 16

23 acquisitions of firms. If the firm pays out more than they can afford the value would be above 1, this is usually not an option in the long-run and it means that the firm is taking the extra money from existing cash balances or by issuing new securities Constant Growth FCFE Model The constant growth model is used to value firms that are only growing at a stable rate. This model is very similar to the Gordon growth model, with the difference that FCFE is used instead of dividends. Important to this model is that the growth rate is reasonable since it continues forever. The growth rate should be set to the nominal growth rate in the economy in which the company operates or close to this if it could be justified. If a constant growth FCFE model is chosen, it is also implied that the firm is a stable firm and that it has the characteristics of a stable firm. (Damodaran, A. 2002) Where, = Value of stock today = Expected FCFE next year = Cost of Equity = Growth rate in FCFE for the firm forever Two-stage FCFE Model Two-stage FCFE model is just as two-stage DDM, used to value a firm that first have a high growth that after some years will turn in to a stable growth. Two-stage models has an advantage to three-stage models in that it is not so sophisticated and you don t have to determine in what way the change from high growth to low-growth occurs. This on the other hand also makes it less true in the real world, since a firm will not go from high to low growth immediately, this would happen over time and you are able to show this decline better in a three-stage model. 17

24 Where, Where, = Free cash flow to equity in year t = Price at the end of the extraordinary growth period = Cost of equity high growth phase = Cost of equity stable growth = Growth rate in FCFE for the firm forever Three-stage FCFE Model (E Model) As mentioned earlier a three-stage model has three separate phases, first there is the high growth phase where the firm experience abnormal growth. Second we have the change from high growth to normal growth, something called the transition stage. Last is the normal or low growth. Where, Where, = Value of stock today = Free cash flow to equity in year t = Cost of Equity = Cost of equity stable growth = Terminal price at the end of transitional period 18

25 = End of initial high-growth period = End of transition period 2.6 Future Growth When predicting future growth for a corporation it important to realize in what stage of the life-cycle the corporation is. As firms grow larger the cash flow and risk exposure is relatively predictable which makes valuation easier. Depending on what stage the company belongs to, the company is faced with different choices. Damodaran (2001) mentions that most usual is to divide the life-cycle into five different stages: 1. Start-up: This is the first stage after a firm is started, usually a firm in this stage is funded by owners equity or by loans. Under this stage a firm is trying to build up a client base and get established. 2. Expansion: When a company has managed to build up a client base and established a presence in the market, the funding needs to increase to be able to expand the company further. Firms in this stage are unlikely to generate high internal cash flows but at the same time investment needs are likely to be high. To fund the investment needs firms are likely to turn to private equity or venture capital, some might even go public to raise the extra capital. 3. High growth: As firms transition into publicly traded firms the financial choices increases. In this stage a firms revenues are growing rapidly but earnings are likely to lag behind, and internal cash flow lags behind the reinvestment needs. Most commonly publicly traded firm will use equity issues to raise the capital needed while when using debt as financing they will most likely use convertible debt to raise the capital. 4. Mature growth: When corporations mature. The growth will start to level off, when this happen the earnings and cash flows that has been lagging behind will rapidly increase and the need to invest in new projects will decrease accordingly. During this period most corporations also change their financing from mainly a equity based financing to a debt financing to fund future projects. 5. Decline: The last stage in the life cycle is the decline. This means that both revenues and earnings will start to decline, as the business mature and new competitors take market share from them. Their existing investments will continue to produce cash flows but this decline over time. No new financing of the company is likely instead 19

26 companies will probably start to retire debt and buy back stock, in a way the company has started to liquidate itself. Figure 4, Future Growth Important to realize is that not all companies go through all five stages and the choices are not the same for all of them, neither are the opportunities. A major part of the companies that are started never makes it past the first stage and are closed down, also many companies continue as small companies without or with small expansion potential. Not all companies choose to go public in fact many choose to be private and can still continue to grow at a healthy rate, Damodaran, A (2001). One way for growth in dividends is to increase the equity from shareholders, then the growth simply arises from the fact a larger amount of capital is likely to generate a larger income stream. When discussing dividends what is usually more interesting is dividends per share, and to increase dividends per share a corporation has to have a rate of return on new capital that exceeds the rate of return on already existing capital. A second options to increase dividends per share is when a company earns a positive return on capital it has the choice to either paying the profit back to the shareholders, which could be by either by dividends or stock-buy-backs, or it can choose to reinvest the earnings for future projects, Barker, R (2001). So for a sustainable growth in dividends, the company needs to have a positive return on shareholders capital and also that shareholders capital will be able to grow either be reinvestment of profits or by new investments, Barker, R (2001) 20

27 2.7 Previous Research There are quite a lot of other studies that have been conducted on firm valuation, some different from others when conducting valuations. They investigate, compare and contrast, which models analysts use and how these analysts look at the models, see Absiye and Diking (2001) and Carlsson (2000). Others focus on how one, or a couple of the valuation models are constructed, see for example Eixmann (2000) There are many scientific studies conducted on forecasting, but most of these are not in the context of firm or stock valuation. They are usually focused on macroeconomic forecasting or short term forecasting where mostly sales volume and similar quantities are forecasted. Textbooks that mention different approaches to forecasting sales are i.e. Copeland et al (2000) In the area of equity analysis, research in finance has not been very successful. Equity analysis or fundamental analysis was once the mainstream of finance. But, while enormous steps have been taken in pricing derivatives on equity, techniques to value equities have not advanced much beyond applying the dividend discount model. Penman, S.H and Nissim, D. (2001) So-called asset pricing models, like the Capital Asset Pricing Model have been developed but these are models of risk and expected return, not models that instruct how to value equities. Traditional fundamental analysis was very much grounded in the financial statements, Graham, Dodd And Cottle s (1962) and financial statement measures were linked to equity value in an ad hoc way, so little guidance was given for understanding the implications of i.e. a particular ratio, a profit margin or an inventory turnover for equity value. Nor was comprehensive scheme advanced for identifying, analyzing and summarizing financial statement information in order to draw a conclusion as to what the statements as a whole really say about the equity value. Penman, S.H and Nissim, D. (2001, p 110) A considerable amount of accounting research in the years since Graham, Dodd and Cottle has been involved in discovering how financial statements inform about equity value. According to Nissim and Penman the whole endeavor of capital market research deals with the information content of financial statements for determining stock prices. There are a lot of papers on this subject such as Lipe (1986), Ou and Penman (1989), Ou (1990) Lev 21

28 and Thiagarajan (1993) and Fairfield, Sweeney and Yohn (1996) that examine the role of particular financial statement components and ratios in forecasting stock prices. However Nissim and Penman argue that it is fair to say that the research has not been conducted with much structure, nor has it produced many innovations for practice. It is important to mention that empirical correlations in these papers have been documented but the research has not produced convincing financial statement analysis for equity valuation. The dividend discount model attraction is its simplicity and its logic, however there are many analysts who view its results with some suspicion because of the limitations that they believe it possess. According to Damodaran (2002) some researcher claim that dividend discount model is not really useful in valuation, expect for a limited number of stable, highdividend paying stocks. A standard critique of the dividend discount model is also that it provides a too conservative estimate of the value. This is based on the notion that the value is determined by more than the present value of expected dividends. It is argued by researchers that the DDM does not reflect the value of unutilized assets, however there is no reason that for these unutilized assets cannot be valued separately and added on the value from the dividend discount model. Some assets that are ignored by the DDM such as value of brand names can be dealt within the context of the model. (Damodaran, A 2002, p. 477) A more realistic criticism of the model is that it does not incorporate other ways of returning cash to stockholders such as stock buybacks. However if one use the modified version of the dividend discount model this criticism can also be countered. There have been done tests on how well the dividend discount model works at identifying undervalued and overvalued stocks. A study of dividend discount model was conducted by Sorensen and Williamson (1980) where they valued 150 stocks from the S&P 500 using the dividend discount model. They used the difference between the market price at that time and the model value to form five portfolios upon the degree of under or over valuation. They made fairly broad assumption in using the dividend discount model. 1. The average of the earnings per share between 1976 and 1980 was used as the current earnings per share. 2. The cost of equity was estimated using the CAPM 3. The extraordinary growth period was assumed to be five years for all stocks 22

29 4. The stable growth rate, after the extraordinary growth period, was assumed to be 8% for all stocks. 5. The payout ratio was assumed to be 45% for all stocks. The returns on these five portfolios were estimated for the following two years (January 1981-January 1983) and excess returns were estimated relative to the S&P 500 Index using the betas estimated at the first stage and CAPM. The undervalued portfolio had a positive excess return of 16% per annum between 1981 and 1983, while the overvalued portfolio had a negative excess return of 15% per annum during the same time period. Other studies which focus only on dividend discount model come to similar conclusions. In the long term, undervalued (overvalued) stocks from the dividend discount model outperform (underperform) the market index on a risk adjusted basis. (Damodaran, A 2002, p. 47) It is clear from Sorensen and Williamson tests that the dividend discount model provides impressive results in the long term, there are however three important consideration in generalizing the findings from these studies. First one, is that the dividend discount model does not beat the market every year, there have been individual years where the model has significantly underperformed the market. 23

30 3 Methodology This chapter motivates the research philosophies and research approach used in this thesis. It will also describe the procedure of the study with ways of collecting information. The intention is to introduce the reader to how the study was conducted as well as give the opportunity to develop a personal perception concerning the trustworthiness of the study. 3.1 Methodological Approach The survey methodology is the tool we use to achieve the purpose we have with our investigation. The method will help us to obtain the necessary information required in order for the authors to enable the objective of this paper. Our method will help us meet our purpose in an efficient way (Holme & Solvang, 1997) 3.2 Outline of the Study Firstly, a background about the subject is given followed by a problem discussion with our main questions leading to the purpose of the thesis. The second part the thesis is the theoretical framework which deals with important concepts for the understanding of the subject such as mathematical models, valuations models and the Dividend Discounted Model and Free Cash Flow To Equity models in particular. The theoretical framework is developed using theories and models based on literature studies of textbooks, scientific articles and other theses. By using these kind of theories we hope to give a good overview of the valuation process we dealing with. Next part of the thesis we present previous research on the chosen subject in order to deepen our knowledge on how these valuations models have been used before and what kind of data previously researcher have conducted. This is important for our thesis since it both gives us an understanding on what kind of problems our valuation models bumped in to before but also how well they have worked. The third part we implement the empirical findings and analysis, we use our chosen models describe in the theoretical framework and present our 10 companies we decided to valuate. This part of the thesis we get an understanding how well Dividend Discount Model and Free Cash Flow To Equity model works and how they differ from each other. Our assumptions made for the different companies are also presented in this chapter, we hope to contribute of the area of valuation theory into practice. Then we have our extended analy- 24

31 sis where we penetrate more deeply our empirical findings in order to for us to see different pattern in the valuation process and explain our results more detailed. The fourth and final part of the thesis is concerned with our conclusions and reflections of how accurate the chosen valuations models were, what measures and models should be taken into consideration in order to increase the usefulness and accuracy of the forecast involved in the valuation process. 3.3 The research process of the thesis PART 1 Background Problem Discussion PART 3 Empirical Findings and Analysis PART 2 Theoretical Framework Extended Analysis Previous Research PART 4 Conclusion Figure 5, The research process of the thesis Reflections and Discussion 25

32 3.4 Inductive vs. Deductive By observing the surrounding world you with induction can make general conclusions from empiric facts. These conclusions can be more or less true, but you can never be absolutely sure about the accuracy of the conclusion. With deduction you make logical conclusions from given premises. If these are correctly made the conclusions are fully certain (Syll 2001). With this approach the researcher tries to generate a hypothesis or proposition from theories of earlier research and test that with the empirical data (Saunders et al, 2007) The inductive approach involves the practice of having no clearly defined hypotheses and a vague problem definition, in general this type of approach is used in social sciences studies due to its unpredictability. It is a method that can be seen as theory comes last which means that the theoretical framework will be developed out of the empirical data (Mason 2002). When conducting a research paper two different research methods are usually used, either you can conclude an inductive research or a deductive research. With the exception from some specific circumstances when the intent of research is totally on development of theoretical constructions, the approach in economics consists of an ongoing interfacing of deduction and induction (Ethridge, D 2004). The result from a deductive reasoning is by necessity true, while a result from an inductive reasoning is probably true or has a high probability of being true. (Herrick, 1995) However in the most research papers a combination of the two approaches is used, according to Alvesson & Sköldberg, (1994) this is called an abductive reasoning. This abductive approach begins with empirical findings but without disregarding the theoretical background. The analysis of the empirical findings can be combined with or preceded by research of existing theories, where existing theories may serve as a source of inspiration for the research to discover new patterns. The aim for this thesis was to get an deeper understanding in how the result differ when calculating stock price for firms when using DDM model compared to FCFE and if there is an specific payout ratio where DDM works better than FCFE. We also wanted to see how accurate DDM and FCFE where when used to value different companies. In order for us to answer these questions we examined the results in the empirical data which were based on the theoretical framework and previous research. According to Holme & Solvang 26

33 (1997), new and existing knowledge can be discovered between the deduction and the induction. Therefore the research approach of this study has both characteristics of an inductive and a deductive study. This because our theoretical framework and prior understanding has been helpful when retrieving the data, and the analysis of the data has helped us obtain an improved and more practical understanding of the models. Different approaches with the models has been used, from Gordon Growth Model to a three-stage FCFE model in order to examine stock prices of the chosen companies, out from this view the elements of both approaches were significant where one was used to create a better understanding of the other. This research is not only based on the collected data to existing proven theories but also based on our own assumptions and understanding of the data, in other words an abductive approach was most appropriate for this thesis. 3.5 Qualitative vs. Quantitative According to Mark Saunders the purpose for using qualitative and quantitative methods is to give a better understanding of the research. In order to determine the most preferable method for our study it s essential to evaluate the underlying problem. (Saunders, M 2007) With this research the authors intended to get a deeper knowledge regarding the methodology concerning different valuation methods. In that sense the qualitative method gives us many advantages over the quantitative method. We wanted to work with a qualitative method since it gives us the opportunity to deepen our knowledge in how to valuate stocks with only two different valuation methods. A quantitative method is used to statistically measure significant differences in order to generalize, qualitative method however is less formalized and therefore provides a deeper understanding when investigating two different valuation methods. (Holme & Solvang, 1997) According to Holloway (1997) qualitative study can be conducted through different methods, either through observations, interviewing or a survey research. The collection of our empirical data will be retrieved from the theoretical framework and previous research. A lot of the information retrieved from interviews can be of a more complex nature and can usually not be transformed into quantities (Holme & Solvang 1997) The research purpose was therefore of a more exploratory approach and not explanatory. When conducting exploratory research, qualitative data should provide deeper knowledge of the concept or the 27

34 investigated problem rather than giving a greater amount of data. Empirical data will also be retrieved by collecting data from annual reports from the years Based on this data we will calculate our own predictions from year and compare our result with up to date values. By doing this we will see how accurate our predictions are. Further, this information will help us to answer our question mentioned above. Important to emphasize here is that the firm sample is going to be randomly selected in order to avoid data to be biased The author s goal with this thesis is to find unique details about the analyzed problem and being able to provide examples and through them make conclusions. 3.6 Data Search To be able to carry out an investigation in the first place, it is imperative to obtain relevant material to work with first. This is where the data search comes in. In order to find the most appropriate theories and models for stock price valuation an investigation of existing material was conducted, leading to a previous research section. In the stock price valuation area there are many sources of information, however the focus to gain information in the subject where on non-fiction books including Damodaran (2002) Investment valuation: tools and techniques for determining the value of any asset. During the process of writing this thesis articles and books were found in the Jönköping University s Library and by the use of databases such as JULIA and JSTORE. Another approach we used when collecting information on the subject was by looking at suggested reading and reference lists from relevant working papers, books and articles. With latter approach it was easier to access find reliable sources in order to establish a comfortable and trustworthy theoretical framework. When we found the initial and new sources some key words where used regularly, examples of key words: firm valuation, equity valuation, business valuation, Dividend Discount Model, Free Cash Flow To Equity. When conducting the data for our case study we used Amadeus, it is a statistical database which contains of a large number of companies where all relevant financial information is summarized. Hence, not all information needed for valuation is provided in Amadeus and therefore we used the company s annual reports in order to fill the missing information. We also used Damodaran (2002) Investment valuation: tools and techniques for determining the value of any asset. when we made our assumption of future growth. Finally, we used different financial internet sources such as and in order to find beta 28

35 and historical stock prices. A summary of the sources used in this thesis can be found in the table below. Data Academic Study Case Study Sources Textbooks Journals Academic Papers Articles Statistical Databases Financial Annual Reports Textbooks Financial Internet Sources Table 1, Sources used in the study 3.7 Criticism of the Sources The first part of the thesis is concerned with conducting the theoretical framework, where literature from textbooks, journals, academic papers and articles is presented. It is important to keep a critical state of mind as regards to the data sources. Extensive searches have been made in different databases containing articles on the Dividend Discount Models and Free Cash Flow to Equity models. The ones used in this thesis have been the only ones appropriate for our purpose. Nevertheless, the thesis is believed to be founded on reliable sources as models from only well known articles and books are only being used. However, it is important to mention that one or two aspects from the latest research might have been overlooked due the amount of data there is on this subject. 3.8 The Approach and Structure of the Thesis In the following text we will describe the approach and structure that this study has in order to answer its purpose. Firstly, we present our theoretical framework where our two different models DDM and FCFE are studied. This part is mostly based upon Damodaran (2002) Investment valuation: tools and techniques for determining the value of any asset. By using this approach we wanted to identify how the models worked, what kind of information we needed in order to use the models and guidance on how to choose which fore- 29

36 casting model to use for the different companies. This provided us with the knowledge of Dividend Discount Model and the Free Cash Flow To Equity Model we needed in order to evaluate our chosen firms. The second approach was to analyze previous research written on the subject to find the academic point of view of the problem in matter. In recent years a lot of articles are written about the valuation models and their inefficiencies and efficiencies and we want to take this approach into our answer. By adding this approach to our study we believe that we got a second dimension to our thesis and since our research is limited in time, conclusion made by other researches can arguably be of great assistance in reaching a solution to the faced problem. Furthermore, a case study will be conducted. This is done to empirically test the presented models in the theoretical framework. Here our 10 companies with all relevant data are presented together with our assumptions. This section examine how well our chosen models works, and how the results differs from the Dividend Discount Model and Free Cash Flow To Equity model. Finally we analyzed and compared our results in the empirical framework in order to form a conclusion that we found was reasonable. Reflections and discussion are then presented as there is more research to be done in the subject of stock price valuation. Why we used this kind of approach and structure of the thesis is depending on different reasons. By following the approach and structure that has been explained above we believe that the study will achieve two things: (1) A critical investigation of the Dividend Discount Model and Free Cash Flow to Equity Model and (2) a creative contribution to the theory we used. Since equity valuation is a broad subject we decided to limit the scope to the two models previously mention so that the validity and reliability of the study could be sufficiently high. Furthermore, other valuation methods are often simplifications of these two models and therefore we found it most interesting to thoroughly study the DDM and FCFE Model. The literature study was built on secondary material in form of articles and financial textbooks, another approach would have been to gather first hand information by interviewing professionals on the subject and then analyzed these findings. One reason why this was not done is that it was hard to find analysts that was interested in participating in the study. 30

37 Further, we had to study a lot of literature in order to be able to understand the valuation. By the time this was done there was not enough time to both use the theoretical framework as well as to form the right sort of questions and contact analysts. By conducting the literature study we were able to establish a deep understanding for our valuation models. Instead of focusing on gathering material on how analysts carry out their forecasts we decided to elaborate the valuations models ourselves as it was reported in financial literature. 3.9 Validity and Reliability This section will discuss the concepts of validity and reliability as measurements of the quality of the thesis. Validity implies that the study really has examined what it meant to and nothing else, whereas, reliability implies that the measurements are correctly executed Thurén (1998). More importantly it will discuss how the approach and process of conducting this thesis can have affected the validity and reliability of the study s results Validity Section 3.8, the approach and structure of the thesis, describe how the thesis was conducted, and more importantly, why it was conducted in this way. Thereby, we hope the reader is able to assess the validity of how the study was conducted and, consequently, the validity of the study and its results. As it is stated in the problem discussion this study is aimed at finding the differences between the DDM and FCFE model when calculating a firm stock price. To achieve this, it is relevant to find material, i.e. data which corresponds to the purpose. Furthermore, it is crucial that the data we found is used in such as way that it leads to fulfilling the purpose. To achieve a high validity as possible it is important to always have a clear picture of what is to be looked for. In order to do that the purpose has to be clear in the mind at all times. Next step involves finding valid secondary data to start the literature review, it is essential to find secondary data relevant for the study. This problem we intended to overcome by using well-known and respected published papers, reports and books. By carefully inspecting the data we gathered, this problem is believed been overcome which means that the secondary data has a high degree of validity. 31

38 3.9.2 Reliability The reliability of a study tells us how reliable the results are, that the measurements are correctly performed. When talking about the steadiness of the measures it is referred as the reliability of the study. In other words, despite consequences of who is conducting the studies, the result should be the same as long as the same method is used (Ghauri & Grønhaug, 2005) Furthermore, quantitative data will not be utilized to a high degree in the literature study, which means that a fairly large part of the study is based on opinions and other subjective perceptions. One can believe that this would make it less reliable since opinions and perceptions differ from persons to persons. However, the case study should increase the reliability of the study. There are mainly two reasons for that (1) The suggestions based on the analysis of the theoretical framework are tested empirically and (2) the case study involves as many as 10 different companies in different industries. By following well-documented and empirically verified methods we believe that the reliability increase. And if someone else conducted a second study they would probably reach similar results and conclusions Criticism of Method By choosing to do interviews with market professionals the result might have been less biased, however we determined that the cost of obtaining primary data was too high. Therefore we concluded, that the way our purpose was constructed the focus on secondary data, previous research and empirical findings was most suitable and correct for this study. Also the choices of using a qualitative method can generate that the analysis will be biased on the authors own knowledge, experience and emotions due to the fact that the information gathered is not quantified, Holme & Solvang (1997). This issue is evident for every researcher conducting a qualitative analysis so therefore we have tried to be as objective as possible in order to produce a non-biased result and analysis. The method of selecting 10 companies can be seen as a disadvantage since it is a fairly low amount of companies and therefore the results might be biased, however with the time limitation we had we argued that valuate 10 companies would give us a good result. Moreover, when calculating the growth for the different companies the chance of inaccuracy exists, since our assumptions are based on the annual reports. We are aware that the in- 32

39 formation taken from annual reports can be biased since a company often gives a more positive picture of their future growth. In order for us to see whether or not our calculated growth was relevant we looked at target prices made from analysts from different wellknown banks and financial institutions. Compared to their predictions we could see how accurate our results were. The disadvantage of using target prices from analysts can be that they also based their assumptions from companies annual reports, more importantly they might use different valuation methods. Another reason why target prices might not be the best comparison is the uncertainty over which time period the target prices are believed to be reached. Every method chosen would have its limitations since there exist no single perfect approach, however we believed that the different choices made within the research approach best reflected our problem statement and guided us to fulfill our purpose. 33

40 4 Empirical findings and Analysis In this chapter we present our findings from the valuation of the 10 companies. We analyze and present our data together with assumptions made for every company. 4.1 Alfa Laval Alfa Laval was started as AB Separator by Gustaf de Laval and Oscar Lamm Jr in In 2005 Alfa Laval sold their products in about 100 countries where 55 of them have their own sales organization. 50 percent of the sales come from Europe while Asia stands for about 30 percent and North and South America stands for 20 percent of the sales, Alfa Laval annual report In 2005 Alfa Laval had about 9500 employees, with most employees in Sweden, Denmark, India, USA and France, Alfa Laval annual report Alfa Laval s core operations are based on three key technologies: heat transfer, separations and fluid handling. They are all of great significance for industrial companies, and Alfa Laval holds leading global market positions within its fields of technical expertise Assumptions Alfa Laval showed a great increase both in net income and revenue over the years of As seen in appendix 2 operating income increased by 8,2 percent and 8,4 percent in 2004 and The increase in net income is a lot more volatile and therefore more difficult to determine an average that could be useful in our calculations of future growth. The average for net income over the years of where as high as 262 percent which is not reasonable to believe that they will continue with for any extended period of time. Considering the growths in both revenue and net income we decided to use a 12 percent yearly increase over 10 years. In Alfa Laval annual report 2005, we can read that Alfa Laval has as a goal to have a 5 percent average annual growth rate over a business cycle, and also that the company shall grow faster than its competition. Alfa Laval also has a focus on a higher profitability, which take place in form of two main activities: First they try to obtain compensation from customers over the short term for increased raw material prices. Second, during 2005 price and profitability per customer and product where analyzed. A number of measures was implemented to develop their ability to improve the customer and 34

41 product mix, with an effect that they gradually been seeing during the year. Further we can read that the share price increased with 60 percent during the year and that they see a strong future for the following years, which we also believe is reasonable. One important way for Alfa Laval to continue their growth is to acquire companies that they feel strengthen their existing products or can add to new key products. We feel that Alfa Laval is underestimating their ability grow in many of their markets, but mainly in South America and Asia, and therefore will have a growth for the next 10 years a lot higher than 5 percent annually, in fact as mentioned earlier we believe that Alfa Laval can grow with as much as 12 percent annually for the next 10 year and then decline to an annual growth of 2,5 percent when the company will mature, 12 percent is somewhat higher than the growth in revenue but considering the growth in net income that they have experienced we feel that this is a reasonable assumption to make.. When calculating the cost of equity for Alfa Laval we used a beta of 1,0623, di.se. The risk free rate used is as in all our calculations the 10-year government bond from which was 3,37 percent. We also use a market premium of 5,5 percent for all valuations. We used a payout ratio of 0,57 over the high growth years, which was the actual payout ratio in 2005, we then assume after the high growth the payout ratio will go up to 0,9 in mature growth Two-stage DDM With the two-stage DDM we got a target price of 273,46 SEK for Alfa Laval, which could be compared to the experts target price of between 165 and 230 SEK, Appendix 6. We value them a little higher than the experts, but since Alfa Laval has shown a great increase in net income over the years of we still feel that this is a reasonable target price by the end of Alfa Laval made a stock split of 4:1 between the years of 2005 and 2010, and the actual price with the stock split was at closing ,7 SEK which is a lot higher than our target price of 68,37 when accounting for the stock split. In comparison the experts target prices would range from 41,25 to 57,5 when accounting for the stock split, all this could be seen in the table below. In the chart below we can also see the percentage of the 35

42 actual stock price that the different valuations reached. Our DDM reached 48,2 percent of the actual value. 140 SEK 120 SEK 100 SEK 80 SEK 60 SEK 40 SEK 20 SEK 0 SEK Alfa Laval 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Figure 6, Alfa Laval stock price valuation Two-stage FCFE When using a two-stage FCFE instead we reached a higher target price of 369 SEK, which could be considered high taking into account that the experts put their target prices between 165 and 230 SEK, but as mentioned earlier we felt comfortable with these numbers since Alfa Laval had experienced a few years of extraordinary growth in net income, and even though we cannot see that they will continue with a growth that high we feel comfortable that they will be able to have a growth of an average of 12 percent over the years of When considering the stock split our target price of Alfa Laval is 92,24 SEK and the actual price was as mentioned 141,7 SEK. In the graph above we can see that our FCFE valuation is as mentioned a lot higher than what the experts are but it is still only 65,1 percent of the actual value of Alfa Laval. Our FCFE valuation was the valuation that reached the closest to the actual price of the Alfa Laval share. 36

43 4.2 Assa Abloy Assa Abloy is a world leading manufacturer and supplier of locking solutions, with over 150 companies in over 40 countries, Assa Abloy holds a world market share of about 10%. Since 1994, Assa Abloy has grown from a regional company with about 4700 employees to a global corporation of companies with more than 29,500 employees and sales of 27,8 billion SEK, (Assa Abloy annual report 2005) Assumptions When looking at the former growth for Assa Abloy we could see that there was some irregularities in the growth in net income, with yearly growth varying from -99 percent to percent so we instead decided to use the growth in operating revenue, and looked at the last years growth and made the assumption that on an average its reasonable that Assa Abloy will continue to grow with approximately 8,3 percent over the next five years which after it the growth will decline to a market growth of 2,5 percent. Also looking at the Assa Abloy s annual statement 2005 we can see that Assa Abloy is planning on creating future shareholder value from a combination of profitable organic growth based on the development on new products and services, extended global market presence and continue improvements in efficiency and selective acquisitions of other companies. Further they mention a goal of 5 percent organic yearly growth over a 5 years period. 5 percent a year is something that we think is a little low, at least over the next five years, especially with their expansion to new markets. Even considering the business goals we feel comfortable in our decision to use 8,3 percent for the years of Since Assa Abloy operates in over 40 countries it is difficult to say what the market growth will be going forward, but with a growth of 2,5 percent we feel comfortable going forward. The Beta used is 0,8927 which is the beta-value that Assa Abloy had , di.se. As mentioned earlier Beta tend to move toward 1 in mature growth but since Assa Abloy has a beta value close to 1 and actually lower than we decided to use this both in the high growth stage and when Assa Abloy experience mature growth. The last major decision we made was to assume that payout ratio for Assa Abloy would increase from an average of 0,33 between , with the exclusion of 2003 where the payout ratio was 52,52, to a payout ratio 0,75 in the year of

44 4.2.2 Two-stage DDM With the two-stage DDM we reached a target price of 136,65 for the end of 2010, when looking at appendix 12 we can see that different companies target price for Assa Abloy varied between 110 and 150 SEK, Which would make our target price right in there. The actual price of Assa Abloy was 189,5 on closing day The graph below shows us how the different target prices and our valuations compares to the actual price of Assa Abloy stock, our DDM valuation is as shown 72,1 percent of the actual value. 180 SEK 160 SEK 140 SEK 120 SEK 100 SEK 80 SEK 60 SEK 40 SEK 20 SEK 0 SEK Assa Abloy 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Figure 7, Assa Abloy stock price valuation Two-stage FCFE Using the two-stage FCFE equity model, with the same assumptions as the two-stage DDM gave us a target price of 140 SEK, which could be seen in appendix 12 or in the graph above, 140 is still in the range of the other valuations from other companies but it still a lot lower than the actual value of 189,5 SEK. In the graph above we can see that our target price with the FCFE is only 73,9 percent of the actual value. The target price that was closest to the actual value was Danske Bank that reached 79,2 percent of the actual value. 38

45 4.3 Atlas Copco Atlas Copco is a world leading provider of products and services ranging from compressed air and gas equipment, generators, construction and mining equipment, industrial tools and assembly systems, to related aftermarket and rental, Atlas copco(2011)a. The history of Atlas Copco dates back as far as 1873, but the core business has remained the same over the years, Atlas copco (2011)b. Atlas Copco s headquarter is located in Stockholm, Sweden. During 2005 Atlas Copco had employees and revenue of 53 billion SEK, (Atlas Copco annual report 2005) Assumptions Operating revenue for Atlas Copco declined in the year 2002 and 2003, but Atlas Copco has been able to work themselves up to a operating revenue that is higher in 2005 than it was back in During 2004 and 2005 the operating revenue increase with 8,9 percent and 8,5 percent accordingly. The growth in net income has been significantly higher between which can be seen in appendix 14. We mostly looked at the growth in operating revenue to decide what future growth to go with, we decided to use a growth of 9 percent that would continue for 10 years before Atlas Copco will go into mature growth in which the growth will decline to 2,5 percent. Another important aspect in our decision to use a 9 percent annual increase is that a financial target for Atlas Copco is to have an annual revenue increase of 8 percent. Further we can also read that during the past 5 years they have managed to have a compounded growth averaged of 6,7 percent, Atlas Copco annual report The beta value in high growth that we used is 1,266 which was the value on , di.se. As mentioned earlier the risk free rate used is the 10 year Swedish government bond from the end of 2005, which at that time was equal to 3,37 percent. Further the Market risk premium is assumed to be 5,5 percent which leads us to a cost of equity in high growth equal to 10,33 percent. In stable growth we used a weighted beta where we assumed that 80 percent would come from the assumption that beta moves towards 1 in stable growth and 20 percent from the beta of Atlas Copco in high growth giving us a cost of equity in stable growth if 9,16 percent. 39

46 The payout ratio for Atlas Copco was assumed to be 0,34 over the years of high growth, 0,34 percent was the actual average in payout ratio over the years of When Atlas Copco matures we assume that the payout ratio will increase to 0, Two-stage DDM With the use of a two-stage DDM we reached a target price of 236,47SEK before the accounting for the split made in ,47 can be compared to the experts target prices which ranged between 155 SEK and 230SEK, so we were actually valuing Atlas Copco a little higher than most of the experts. If we instead would take into consideration the 2:1 stock split we would have a target price of 118,23 SEK which could be compared to the experts of between 77,5 and 115 SEK, the actual price on the last day of trading in 2005 was 169,7 SEK so both our valuation and the experts target prices was far from the actual price which could be seen in the graph below. Our DDM valuation was only accounting for 69,7 percent of the actual value of the stock at closing time Atlas Copco 160 SEK 140 SEK 120 SEK 100 SEK 80 SEK 60 SEK 40 SEK 20 SEK 0 SEK Actual Stock price DDM Valuation FCFE Valuation Morgan Stanley Lehman Brothers Lehman Brothers Bear Stearns 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Figure 8, Atlas Copco stock price valuation 40

47 4.3.3 Two-stage FCFE With the two-stage FCFE model we reached a target price with taking into account the stock split of 167,64, which could be compared to the actual price of 169,7 SEK, which was relatively close to the actual price. Actually the target price that was closest to the actual value including all the experts as seen in the graph above, it was 98,8 percent of the actual price or only 1,2 percent away from the actual price if you want to look at it that way. 4.4 Axfood Axfood was founded in 2000 in the intents to create a consumer-oriented food retailer. It was founded through the merger of Hemköp and D&D Dagligvaror, and the acquisition of Spar Inn Snabbgross, Spar Sverige and Spar Finland. At the point of its establishment Hemköp was listed on the Stockholm Stock Exchange and as an outcome of the merger the listing was taken over by Axfood. Axfood is today listed on the Nasdaq OMX Stockholm AB s Large Cap list. ( In 2005 Axfood had a market share of 13,5 in Sweden and had 235 owned stores but a total of over 500 stores are connected to Axfood Assumptions As mentioned earlier, the major limitation to valuation is the assumptions about the future that you have to make. When valuing in Axfood we used data from the annual reports to value the firms future. With this data we assumed a future high growth of 10 percent for 5 years, and that the growth would then decline over 5 years to reach a stable growth of 2,5 percent by The High growth is assumed from the fact that Axfood between 2001 and 2005 had 2 years of growth in net income of between 9,4 percent and 10 percent, even considering one year of extraordinary growth and 1 year with negative growth we feel that over the years of and yearly growth of 10 percent is reasonable. We have also been taking into consideration Axfood s operative goals, where they have as a goal to grow with a profitable growth, with a high emphasis on profit. They are also aiming for their own products to account for 25 percent of total revenue in 2006, up from 20 percent in Further they are working to make Axfood more cost effective for the future, Axfood årsredovisning Axfood s continued work to make their operations more profitable and work to cut cost makes, together with our analyzes of earlier growth makes us comfortable in a 10 percents yearly growth for the next five years. 41

48 stage DDM With the assumptions made for Axfood we reach a assumed price of Axfood in the end of 2010 of approximately 282 SEK which could be compared to the actual price on the closing time where 251,5 kr. This is a bit higher than what HQ Bank valued Axfood in , their target price was 240 SEK. The actual price of Alfa Laval on was 251,5 SEK which as seen in the graph below is a little bit higher than the highest of the experts but a little lower than our DDM value that was overvalued with 12,3 percent. Axfood 300 SEK 250 SEK 200 SEK 150 SEK 100 SEK 50 SEK 0 SEK 130% 120% 110% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Figure 9, Axfood stock price valuation stage FCFE With the same assumptions for both models we reached a price suggestion of 335,76 SEK with the 3-Stage FCFE model. Comparing to the 3-stage DDM this is a fairly large increase of the stock price. As seen in the graph above we can see how much the FCFE model actually varied from the actual stock price, in fact it was overvalued with 33,5%. To compare our FCFE valuation to the experts ones we can see in the graph above that we have reached a much higher value. As seen in appendix 25 the experts valuation varied between 180 SEK and 240 SEK, in other word they all undervalued Axfood. 42

49 4.5 Boliden Boliden is the third largest copper metals supplier and the third largest zinc metals supplier in Europe. Their operations focus on the initial stages of the processing chain, in other words exploration, mining and milling, smelting, refining and recycling. Metal recycling is a field in which Boliden is a global leader and is also a growing sphere within Boliden operations. Boliden is today listed on the Nasdaq OMX Stockholm AB s Large Cap list ( Assumptions We based our assumptions on the annual reports from , when calculating the growth we could see that in fluctuations in growth in net income were enormous, between 2003 and 2004 Boliden had i.e. a growth in net income of over 8000 percent, see appendix 26. In order to get a more relevant future growth we decided to used the growth in Operating Turnover instead, see appendix for values. We weighted the growth in operating turnover in order to get an assumed future high growth, this was 19,1 percent. This growth will not last forever so therefore there will also be a period of stable growth which according to Damodaran (2002) should be set to the market growth which is approximately 2,5 percent. Consideration has also been taken of Boliden s goal to become Europe s leading copper and zinc producer and according to Boliden annual report 2005 this will be achieved by improving productivity and cost-effectiveness. Boliden also have many growth opportunities to take advantage of in the near future both in their mines and smelters as soon as the conditions are right, Boliden annual report We can also read that they see a bright future in 2006, both internally and externally for boliden. With their stated growth potential in the Boliden annual report 2005 and the our predictions in historical growth we feel comfortable with our assumed rate of 19,1 percent as high stage growth. When calculating cost of equity in high growth we used a beta of 1,9971 from 2008, no previous beta was found, ( According to Damodaran (2002) the beta tends to move towards 1 in stable growth so therefore we weighted the beta in high growth in order to get the beta in stable beta which became 1,

50 4.5.2 Two-Stage DDM With the assumptions mentioned above calculated with the Dividend Discount Model we reached a future stock price of 173,16 SEK as seen in appendix 30, this can be compared to the actual stock price in of 136,7 SEK. When UBS valuate Boliden in they predicted a target price of 140 SEK. All the experts target prices and our valuations is shown in the graph below, as seen in the graph our DDM valuation is overvalued compared to the actual price with 26,7 percent. Boliden 200 SEK 175 SEK 150 SEK 125 SEK 100 SEK 75 SEK 50 SEK 25 SEK 0 SEK 140% 120% 100% 80% 60% 40% 20% 0% Figure 10, Boliden stock price valuation Two-Stage FCFE Based on the same assumptions as for the Dividend Discount Model we reached a future stock price with the Free Cash Flow To Equity Model of 215 SEK. This is a bit higher than our predictions with the DDM and a as seen in the graph above it is a lot higher than the actual price. When comparing to the experts target prices to our target price, our price was more than twice some of the experts target prices for the period. 44

51 4.6 Ericsson Ericsson was started in 1986 by Lars Magnus Ericsson, as a telegraph repair workshop, Ericsson (2011) a. Since then the industry has grown and with it Ericsson has grown, today Ericsson is a one of the world leadings providers of telecommunication equipment and services for telecommunication operators worldwide, both for mobile and fixed network, Ericsson (2011) b. Ericsson is today listed on the Nasdaq OMX Stockholm AB s Large Cap list Assumptions It is extra difficult to predict the future of Ericsson since it has changed so extremely over the years of To start with they dropped in operating revenue from 240 billion in 2001 to 119 billion kronor in 2003 and then started to grow again. In 2002 they also took in 28 billion kronor in a new issue. We assumed for our valuations that Ericsson are a stable corporation operating in an ever changing industry, and that an average grow from 2005 going forward would be around 2,5 percent a year. Ericsson on the other hand have a relatively low payout ratio of only 0,17 during Since the payout ratio is low we decided to use a two-stage model even though the growth would remain constant, and instead after 5 years use a higher payout ratio to reflect a higher future payout. 45 percent of Ericsson sales comes from emerging markets and 55 percent comes from developed markets. Further it is mentioned that even though most cities in emerging markets have GSM networks there is a possibility for increased coverage in rural areas and to increase the capacity in cities. A disadvantage in the emerging markets are still that the subscriber penetration is low in most of these markets. In the developed markets Ericsson still see some potential to grow even though the already high penetration levels that exists, Ericsson annual report As mentioned earlier a decision was made to use a two stage model but to not to use a high growth stage and a low, it was just used to get the dividend up to a level that we feel is reasonable in The use of a stable growth comes from as mentioned earlier the analyze of historic growth rates and after reading Ericcson s annual report 2005, where even though they look at the future as bright we cannot really see any concrete indications that they would experience rapid growth in the future. 45

52 In 2008 Ericsson had a beta value of 0,7979 which would result in a cost of equity of 7,76 percent in a high growth stage. Further we assumed that the beta for Ericsson would remain constant going forward. As mentioned earlier we decided to use a two-stage model even though the fact that we predict that Ericsson are a stable corporation and will not experience a future high growth. This may be a little unconventional but we feel that it s the best way to go with to value Ericsson. Its also important to know that Ericsson made a reverse stock split in June 2010 where 5 Ericsson shares was turned into 1. So the share price that we received was multiplied with 5 to get a price that could be compared with the stock price of Ericsson on closing day December 30, Two-stage DDM Using the two-stage DDM we got a target price of 16,72 SEK that could be compared to the experts target prices that ranged from SEK as seen in appendix 36. The actual price of the Ericsson share was at closing ,15 but in this price we have to account for the reverse stock split 1:5 that Ericsson made between the years of , with this reverse split our target price would instead be 83,60 SEK and the Experts target prices ranging from 120 SEK and 175 SEK. In the graph below we can see how our valuations and the experts valuation are compared to the actual stock price. Our DDM valuation was the best prediction overall, with an overvaluation compared to the actual stock price with 7 percent. 46

53 180 SEK 160 SEK 140 SEK 120 SEK 100 SEK 80 SEK 60 SEK 40 SEK 20 SEK 0 SEK Ericsson 225% 200% 175% 150% 125% 100% 75% 50% 25% 0% Figure 11, Ericsson stock price valuation Two-stage FCFE With the FCFE model we instead got a target price of 27SEK (135,56 with reverse split) this value would be right in the range of the experts target prices, that was as mentioned earlier between 24 and 35 SEK. With the FCFE model we reaches a price that was much higher than what the actual price of the stock was on closing day but so was also the experts target prices as seen in the graph above. 4.7 H&M AB H&M was established in Västerås, Sweden, in 1947 by Erling Persson, HM (2011). H&M does not have any factories themselves, instead they work with over 700 independent suppliers from mainly Asia and Europe. In 2005 H&M employed over people. H&M has as a goal a annual increase in stores of percent and also to increase sales in all existing stores. In 2005 H&M where able to open 145 new stores while they closed 20 stores, resulting in an increase of 12 percent, H&M annual report

54 4.7.1 Assumptions When valuing H&M we analyzed the growth in net income over the years and we could see that the growth varied some over the years but we decided to go with a weighted average of the 80% of the lower values and 20 percent of the higher, see appendix 38 for growth values. This resulted in a growth of 18,1 percent which we felt was in the high range but we decided to only go with a high growth of 5 years so that could compensate a little if the growth would be lower but the period of high growth longer. When making the decision to use a growth of 18,1 percent we also took into consideration the goals of H&M for the future. As mentioned earlier H&M has as a goal to increase the number of stores by percent per year but also to increase sales at existing stores, H&M annual report In 2005 H&M increased the number of stores with 12 percent while they increased operating revenue (turnover) with 14 percent and net income with a total of 25 percent. Further, over the last 5 years H&M has increased the number of stores with a total of 75 percent and turnover with 100 percent, H&M annual report We believe that this increase cannot continue forever but we see no reason to why it could not continue for at least the next 5 years. In H&M annual report 2005, we can also read that H&M will continue their expansion for the years to come and they have a goal of increasing the number of stores by around 150 stores in The expansion will mostly take place in countries as USA, Spain; Germany; the UK, France and Canada, but they also are opening stores in new markets during the following years. Another important step to increase sales are made with the decision to increase the catalogue and online sales by expanding outside the Nordic countries. As mentioned earlier we do not see that H&M s growth could continue forever, especially not at the rate that they grow at between 2001 and At the same time we cannot see that they can expand more in many of their core markets and that after 5 more years of high growth we feel comfortable with declining H&M growth to a stable growth 2,5 percent that could be compared to a usual market growth for a industry or country. According to di.se beta for H&M 2008 was 0,6291, which we decided to use both for the high growth stage and low growth, usually beta moves towards 1 in stable growth but since H&M has a beta lower than 1 we feel that its reasonable that they will stay at that level even in the low growth stage. A beta of 0,6291 results in a cost of equity for H&M of 6,83 percent. 48

55 Finally we made an assumption about the payout ratio for H&M and that it will increase from the average between of 0,55 to 0,75 in the low growth stage Two-stage DDM In the two-stage dividend discount model we reached a price for H&M of 455,69kr which could be compared to the experts target prices that ranges from 200 to 350 as seen in appendix 42. With the two-stage DDM we have a target price somewhat higher than the sxperts. H&M made a stock split 2:1 during the years of so if we take that into account we instead have a target price of 227,84kr to compare to the actual stock price on closing day that was 224kr. So the valuation only differed with 1,71 percent from the actual value. If we instead looked at an average of , and the actual stock price would be 226,27kr resulting in a difference of 0,67 percent between our calculation and the actual value of the H&M stock price. Hennes & Mauritz 225 SEK 200 SEK 175 SEK 150 SEK 125 SEK 100 SEK 75 SEK 50 SEK 25 SEK 0 SEK 100,00% 90,00% 80,00% 70,00% 60,00% 50,00% 40,00% 30,00% 20,00% 10,00% 0,00% Figure 12, H&M stock price valuation Two-stage FCFE When using the two-stage free cash flow to equity model the result that we get is somewhat different from the two-stage DDM, here we receive a future stock price of 193,15kr including the stock split which could be compared to the target prices that the expert set that in- 49

56 cluding the stock split would range from 100 to 175 SEK. Our target price is 13,77 percent from the actual price, and 14,64 percent from the average actual price. 4.8 Holmen Holmen is a forest industry group that manufactures printing paper, paperboard and sawn timber and runs forestry and energy production operations. The company s extensive forest holdings and its high proportion of energy production are strategically important resources for its future growth. Holmen s business concept is to grow and develop and to run profitable and sustainable business within three product-oriented business areas for printing paper, paperboard and sawn timber, as well as within two raw-material-oriented business areas for forest and energy. Europe is the main market. Holmen is today listed on the Nasdaq OMX Stockholm AB s Large Cap list. ( Assumptions When analyzed Holmen we started by looking over the growth in net income from years , see appendix 44 for values. It is clear that the growth varies between the years , however between there is a growth of 3,7%, and based on the forest industry Holmen operates on which is fairly stable we assume that they will have a stable future growth of 2,5% from Even considering that the growth over some years differed a lot see i.e when the growth went from -10,4% to -25,9% we still assume that the growth after year 2005 we be more stable as mentioned above. According to Holmen annual report 2005, Holmen has as a goal to grow at a faster rate than the market, and they will do so by attractive products, active marketing and product development, further the growth shall be organic or come from selective acquisitions. Further Holmen s main market is Europe and its accounts for 90 percent of the group s sales. In Holmen annual report 2005 we can also read that they themselves realize that they operate in a relatively mature market and that their growth have average a few percent a year over the past decade. In our decision to use a one stage model for Holmen we took into consideration our calculation of historical growth together with the expectation from Holmen annual report 2005 to come up with a growth of 2,5 percent in perpetuity as mentioned earlier. 50

57 When calculating cost of equity we used a beta of 0,7 according to Holmens annual report from Another assumption we made was that the relative high payout ratio of 0,67 will continue to stay at that level Gordon Growth Model Based on our previously assumptions with a stable future growth of 2,5 percent Gordon Growth Model was our model of choice when we evaluated Holmen. The riskfree rate of 3,37 percent is from Riksbankens 10 year government bond from We reached an assumed future price of 246 SEK with GGM which can be compared with the actual stock price in of 221,4 SEK. It is important to mention here that in our calculations of 246 SEK we didn t took into account the extra dividend Holmen paid out the years 2001, 2003 and ( Our stock price of 246 SEK with GGM can be compared to UBS target price in of 250, only 4 SEK difference between our future predictions of Holmens stock price. As seen in the graph below we can see that our DDM valuation was overvalued with 11 percent and the best valuation did Credit Suisse with an overvaluation of only 6,6 percent. Holmen 450 SEK 400 SEK 350 SEK 300 SEK 250 SEK 200 SEK 150 SEK 100 SEK 50 SEK 0 SEK 200,00% 175,00% 150,00% 125,00% 100,00% 75,00% 50,00% 25,00% 0,00% Figure 13, Holmen stock price valuation 51

58 4.8.3 FCFE With the same assumptions as for Gordon Growth Model we reached a future stock price of 483 SEK with the Free Cash Flow to Equity Model, which is a huge difference compared to the GGM as seen in the graph above. When Handelsbanken valuate Holmens stock price in their target price in 293 SEK, however Affärsvärldens came up with a higher target price in of 350 SEK, which is more close to our stock price of 483 SEK. 4.9 TeliaSonera TeliaSonera is a public trade company that is listed on both NASDAQ OMX Stockholm and Nasdaq OMX Helsinki. TeliaSonera is the result of the merger the of Swedish telecommunication company Telia and the Finish telecommunication company Sonera. The merger took place in December of 2002 and it formed a leading telecommunication group in the Nordic and Baltic regions with strong market positions in Euroasia, Russia and Turkey, teliasonera.com. TeliaSonera is the leading telecommunication leader in Sweden, and Telia was earlier operated by the Swedish State as a public service corporation, Televerket. In June 2000 the Swedish state sold 30% of its shares in an initial public offering and the Telia share was listed in the A-list of the Stockholm Stock exchange, teliasonera.com. In 2005 net sales for TeliaSonera increased by 7 percent to a total of over 87,6 billion SEK Assumptions TeliaSonera growth has varied a lot over the years of , but a trend is seen in net income growth where the growth have declined over the last years. TeliaSonera further operates in a mature market, where prices have declined over many years now and we see no reason to believe that this will stop anytime soon. The difficulties in finding the growth lies in the fact that TeliaSonera operates in many different countries where there are different economical factors playing in, TeliaSoneras major markets in the Nordic market are in a stable state but there might still be some room to grow in the markets in Balticum and Russia. With this in mind we still believe that a reasonable growth for TeliaSonera is 2,5% a year for the future. In TeliaSonera annual report 2005 we can read that a strong pressure 52

59 on prices exist in the market, in Finland mobile prices fell with as much as 20 percent. The price pressure is however compensated by an increase in volume. In other countries that TeliaSonera operates in the price pressure has not been as high as in Finland but in the annual report we can also read that they expect a further price pressure in places like Euroasia and Turkey. Another important business product for TeliaSonera is fixed voice and in that area both prices and volumes decline in almost all markets. Broadband prices are also declining in almost all markets. When taking into account what they mention in the annual report we can see that it looks like there is a high price pressure on all major products that TeliaSonera have and over most markets. At the same time volumes continue to increase to compensate for the decrease in prices. We see no reason to believe that this tendency will change anytime soon, especially with fixed voice, where we believe a large emigration from fixed voice to mobile voice will be accuring in the years to come. On a more positive notice we believe that the volumes in customer stock will continue to increase in the future and that this will compensate for the decline in prices, we also believe that the use of mobile product will increase in the future compensating for some of the price fall. With our analysis of historical growth together with what TeliaSonera expects for the future and our expectation of the market for the future we feel comfortable with the earlier mentioned stable growth of 2,5 percent in perpetuity. According to dn.se the beta value for TeliaSonera is equal to 0,6268. We made the decision to use the same beta for all years. Even though TeliaSonera is mature company their payout ratio is relatively low, in 2005 they only payed out 41% of the maxium possible. We feel that a more accurate payout ratio to use would be to use 0,7 since we use Gordon growth model Gordon Growth Model With the Gordon growth model and the assumption that TeliaSonera will have a payout ratio of 0,7 we get to a target price 49,1 SEK, this could be compared with the experts target prices as seen in appendix 54. The experts target prices for TeliaSonera varies between 44,2 and 46 SEK. The price of the TeliaSonera stock at closing was 53,30 SEK, our future value of 49,1 SEK was only undervalued with 7,9 percent as seen in the graph be- 53

60 low. In the graph below we can also see that our DDM valuation is the one that was closest to the actual price. TeliaSonera 70 SEK 60 SEK 50 SEK 40 SEK 30 SEK 20 SEK 10 SEK 0 SEK 140% 120% 100% 80% 60% 40% 20% 0% Figure 14, TeliaSonera stock price valuation FCFE The target price that we got using the FCFE 75,1 SEK, which is a lot higher than both the actual price of 53,3 SEK and the experts target prices. Our target price was actually 40,9% from the actual price as seen in the graph above Volvo The Volvo Group is one of the world's leading providers of commercial transport solutions, providing such products as trucks, buses, construction equipment, engines and drive systems for boats and industrial applications, as well as aircraft engine components. The Volvo Group also offers financial solutions and an increasing share of other services to its customers. Volvo Group has about 90,000 employees, production facilities in 19 countries, and sales activities in some 180 countries. Group sales of products and services are conducted through both wholly owned and independent dealers. Volvo is today listed on the Nasdaq OMX Stockholm AB s Large Cap list. ( 54

61 Assumptions When analyzed Volvo Group we started by looking at the growth in net income, here we can see that there was some irregularities, with yearly growth varying from -78,6 percent in 2003 to 3039,3 percent in Because of these huge irregularities we decided to look at operating turnover instead. This growth has been fairly stable, however between the years 2003 to 2004 the growth increase from -1,6 percent to 15,3 percent, see appendix 54. Followed by a small decrease in growth from 15,3 percent in 2004 to 13,9percent in Based on this data and the market Volvo operates in we assumed that Volvo Group is a typical one stage company, with a constant stable growth rate of 2,5 percent from It s important to mentioned that Volvo operates in over 180 countries and therefore its fairly hard to predict any stable future growth rate, however we feel comfortable with a market growth of 2,5 percent since according to Damodaran (2002) this is normal for a company as Volvo. In Volvo annual report they have as a goal to grow with an average of 10 percent annually which should be achieved with through both organic growth and acquisitions. They also have an annual goal to achieve a a return on shareholder s equity of percent a year, but only managed to actually achieve an average of 6,4 percent between 2001 and We believe that an average annual increase in net income of 10 percent is way to high for Volvo over a business cycle. As mentioned earlier we feel more comfortable with an average growth of 2,5 percent in perpetuity. We cannot see that there is exist a potential to aquire good enough companies that can keep up the net income at the same rate as net sales increase, so even if they can grow with an average of 10 percent a year in net sales we do not see that they will do it in net income. Further Volvo operates in a very non stable industry which add to our ecpectaions that they will only grow with an average of 2,5 percent in perpetuity as mentioned earlier. The beta we used is taken from , based on this we got a cost of equity of 11,7% Gordon Growth Model Based on our previously assumptions with a stable future growth of 2,5 percent Gordon Growth Model was our model of choice when we evaluated Volvo. The risk free rate of 3,37 percent is from Riksbankens 10 year government bond from With this data we reached a future stock price of 63 SEK which can be compared to actual stock 55

62 price of 118,5 SEK in It is important to mentioned that in 2010 Volvo execute a 5:1 split on all their stocks, before the split we reached a future stock price with GGM of 315,5 which can be compared to Credit Suisee target price of 300 SEK in as seen in the graph above. Volvo 110 SEK 100 SEK 90 SEK 80 SEK 70 SEK 60 SEK 50 SEK 40 SEK 30 SEK 20 SEK 10 SEK 0 SEK Actual Stock price DDM Valuation FCFE Valuation Evli Bank Deutsche Bank Credit Suisse Kaupthing Bank 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Figure 15, Volvo stock price valuation FCFE With the same assumptions as for Gordon Growth Model we reached a future stock price of 87,2 SEK with the Free Cash Flow to Equity Model, and before the split in 2010 we reached a stock price of 436 SEK which can be compared to the target price of 400 SEK Deutsche Bank made in , see appendix 60. With the FCFE valuation we came up with a valuation that was undervalued with 2,4 percent as seen in the graph above. 56

63 5 Extended Analysis In this part of the study an extended analysis is made where we combined all of the data in order to explain and analyze our findings which we will later base our conclusions upon. When analyzing the results from the valuation some interested differences between the valuation methods where found. FCFE valuation accounted for the 5 most overvalued predictions ranging from an overvaluation of 33,5 percent to an entire 118,2 percent overvaluation as seen in appendix 61. On the other hand DDM accounted for the 2 valuations that were the most undervalued with an undervaluation of 51,8 percent and 46,8 percent and also for 4 out of the 5 valuations that where the lowest. Further, another interesting finding is that FCFE valuation made a higher valuation on 9 out of 10 companies in this study. This comes as an result from the fact that FCFE use all the earnings that could potentially be paid out to the shareholders in its valuation while modified DDM only uses what is actually paid out to the shareholders or what shareholders pay into the company in form of dividends, share repurchase and new share issue. In the table below we can see a summary of the two different valuation models. As shown below the valuations made with the DDM undervalued the stock price with an average of 11 percent while FCFE overvalued the stock with an average of 21 percent. So on average the valuations are not that far away from the actual value, but as mentioned earlier the actual valuation could differ a lot from case to case. In the table below we can also see how the spread between the two different models differs. Average DDM valuation -11% Average FCFE valuation 21% Median DDM valuation -3% Median FCFE valuation 16% Lowest DDM valuation -52% Lowest FCFE valuation -20% Highest DDM valuation 27% Highest FCFE valuation 118% Spread 0, Spread 1,3792 Table 2, Summarize of DDM and FCFE valuations An analyze was also made to see if there was a tendency for one or the other valuation methods to perform better when valuating companies with higher or lower dividend pay-out ratios. The analysis shows that there is a tendency for FCFE to work better on corporations that do not pay out a lot of dividend. In fact 3 out of 4 FCFE valuations that made a more accurate valuation than what you got with the DDM valuation are within the 5 com- 57

64 panies that paid out the least dividend in The opposite also holds true for DDM where 4 out of the 6 valuations that performed better than FCFE are the 5 corporations that had the highest dividend pay-out ratio of the 10 companies in These 5 companies had a dividend pay-out ratio off between 41% and 80% in The only valuation with DDM that performed well even though that pay-out ration was low was Ericsson where the valuation was only 7% overvalued. We cannot see that there is an exact relationship between how high the dividend pay-out ratio is and how well the different valuation models work but from the analysis made, we get a indication that FCFE valuation works better on companies that have a low pay-out ratio and that DDM valuation works better on companies with a higher rate of dividends payout. This is very logical due to the fact that DDM only take into account the dividends that are being paid out. And if using modified dividend discount model which is used in this research you also take into account stock buy backs and new stock issued. So companies that do not pay out all the dividends that is possible may save some money for a number of different reasons, such as acquisitions, investments in future growth, employee bonuses and a lot more. The theory holds that money reinvested into the firm should be used to create more future value. If the money that is reinvested in the firm actually is used to create more value, the company should continue to increase as seen in chapter 2.6. However if the companies on the other hand pay out a large part of its dividends to its shareholders it doesn t have a out of money to continue growing with, this will probably lead to a decrease in future growth. This is where DDM and FCFE differs a lot, DDM only take into account what is actually paid-out to its shareholders in form of dividends and also future dividends. FCFE on the other hand take into account all that is possible to be paid out as dividends from today and in the future. So, will everything that is going to be reinvested into the company and not being paid out come back to the shareholders in form of future dividends? Our research suggests that this is not in fact true. On an average as mentioned earlier the FCFE overvalued the shares with an average of 21 percent. We would like to argue that this is because shareholders realize that not all money that is reinvested back into the companies goes to projects with a positive NPV. Sometimes this might be a project that back fires or sometimes it is used on a acquisition that they have overpaid for and sometimes it might even be on benefits for employees and board members that do not create any value for the shareholders. In contrast, when using modified DDM to value a company you only use the dividends, stock repurchase and new stock issue to value the company, you also look at how you think the dividends will grow in the future. Something that can easily be missed is when companies 58

65 Datum do not pay out a lot of dividends over a longer period of time and do not invest the money that is being held within the company in i.e. projects. This can result in an undervaluation of the shares with the DDM. Further problems can come from determining the future growth of the companies that is being valued. That is why we used 5 years of history of each company to get an idea of which state the company is in as seen in Chapter 3.1. After doing so you can choose to use a 1-stage, 2-stage or 3-stage model that will best fit the company being valued. Even with that information being correct there are a lot of factors that could be more difficult to facture in, like future fluctuations in the market as whole and also future problems that the company might run into with an ever growing global market Alfa laval Assa Abloy Atlas Copco Axfood Boliden Ericsson H&M Holmen TeliaSonera Volvo Figure 16, Stock prices In the table above we can see actual changes in the stock price on a day to day basis for the different stocks in this thesis. We can also see as mentioned earlier that some companies during this 5 year period has made stock splits and that some also have made reverse stock splits. This has all been taken into account when making the analysis of the results from the valuations. With variations like the ones we see in the graph above and also in figure, it is easy to see why stock valuations is so difficult to get accurate, there is an unknown number of parameters that affect every single stock and also the market as a whole. 59

66 6 Conclusion In this chapter conclusion are being drawn from the analysis in order to answer the purpose and research questions. Within this study we valued and compared Dividend Discount Model and Free Cash Flow To Equity Model. 10 different companies from OMX Stockholm 30 was valued with both models in order to get a deeper understanding of how the models function in practice and based on that data answer our research questions. How will the result differ when calculating stock price for firms when using DDM compared to FCFE? A conclusion can be drawn from our analysis that the result differs a lot from the use of the two different valuation models and that they work better in different situations. When comparing DDM to FCFE we found that FCFE valuation made a higher valuation on 9 out of 10 companies in this study. Moreover FCFE valuation accounted for the 5 most overvalued predictions ranging from an overvaluation of 33,5 percent to an entire 118,2 percent overvaluation. DDM on the other hand accounted for the 2 valuations that were the most undervalued with an undervaluation of 51,8 percent and 46,8 percent and also for 4 out of the 5 valuations that where the lowest. How accurate are DDM and FCFE model when used to value different companies? None of the two models are very accurate when it comes to valuate a specific company, there are too many unknown parameters that can affect the result. The research results confirm this conclusion due to the fact that the spread for both DDM and FCFE model is large. When valuating the 10 companies with the DDM the results from an undervaluation of 52 percent to a overvaluation of 27 percent. FCFE model on the other had an even larger spread with an undervaluation of 20 percent to an overvaluation of 118 percent. Even though the spread were fairly large for the two models they perform reasonably well on an average. The DDM undervalued the stock price with an average of 11 percent while the FCFE model overvalued the stock price with an average of 21 percent. The results from the study show that the DDM performs better than the FCFE model on the average valuation price. It also shows that the DDM had a lower spread compared to the FCFE model. 60

67 Is there a specific payout ratio where DDM works better than FCFE? In the research we saw that there is a tendency for FCFE valuation to work better with companies with a low dividend pay-out ratio and that DDM valuation works better on companies with a high dividends pay-out ratio. However we cannot draw a conclusion from our study that there exist an exact correlation between dividends pay-out ratio and which model that would perform better. There are many indicators that would suggest that DDM performs better when valuating firms with higher pay-out ration. In contrast FCFE model works better when valuating companies with lower pay-out ratio. On the other hand we cannot see that there is an exact ratio that works as a cut-off point for when you should use DDM and when you should use FCFE model to get the most accurate valuation. 61

68 7 Discussion and Reflections Even though we are happy with the results that are shown, this is a very limited research that is made. This research is limited to only the Swedish stock market and even to OMX Stockholm 30, which only includes the largest 30 companies in Sweden. Out of the 30 companies 10 is picked for this research. Also the data that was collected was only collected between the years of 2001 and 2005 to use for the company valuations. If we would have had more time and resources this research could have been expanded to a larger sample in Sweden with shares from all lists in Sweden if we would have wanted to concentrate on the Swedish market or it could even be expanded to have large sample of shares from all the world s stock markets to show how it works in a larger picture. Following if we would have had more time and resources it would have been a good idea to also use maybe 10 years of information back in time from for example from 2001 to 2010 and then to value 5 or 10 years ahead of time to see the result, this would not work as a master research paper but for a doctorial study it might be a good alternative since you would not have it biased from knowing how a company have performed during the years. 7.1 Future Studies It would have been interesting to do interviews with market professionals, the results might have been less biased. Also the decision of selecting 10 companies can be seen as a disadvantage since it is a fairly low amount of companies and therefore the results might be biased, so for future studies it would be wise to include more than 10 companies when conducting this kind of study. 62

69 8 References Articles Casti. J, (1998), BizSim The World of Business in a Box Fairfield, P. M., R. J. Sweeney, and T. L. Yohn. (1996). Accounting Classification and the Predictive Content of Earnings. The Accounting Review 71, Graham, B., D. L. Dodd, and S. Cottle. (1962). Security Analysis. New York, NY: McGraw-Hill Book Company, Inc. Lee, C.M, Myers, J. and Swaminathan, B. (1999), What is the Intrinsic Value of the Dow?, Journal of Finance 54, Lipe, R. C. (1986). The Information Contained in the Components of Earnings. Journal of Accounting Research 24, Ou, J. A. (1990). The Information Content of Nonearnings Accounting Numbers as Earnings Predictors. Journal of Accounting Research 28, Ou, J. A., and S. H. Penman. (1989). Financial Statement Analysis and the Prediction of Stock Returns. Journal of Accounting and Economics 11, Literature Alvesson, M. & Sköldberg, K Tolkning och reflektion Vetenskapsfilosofi och kvalitativ metod. Lund: Studentlitteratur Barker, R. (2004) Determining value : valuation models and financial statements, Gosport: Pearson Educational Limited Barker R., (2001), Determining Value: Valuation Models and Financial Statements, Financial Times, Prentice Hall Bodie, Z., Kane, A., & Marcus, A. (2008) Essentials of Investments, (7 th edition). New York: Mcgraw-Hill/Irwin Copeland, T. et al. Valuation: Measuring and Managing the Value of Companies. New York, John Wiley & Sons, 2000 Damodaran, A., Investment valuation: tools and techniques for determining the value of any asset. 2nd Ed. New York: John Wiley & Sons, Inc. Damodaran, A. (2001) Corporate Finance Theory and Practice, USA: John Wiley & Sons, Inc 63

70 Elton, Gruber, Brown, & Goetzmann (2011). Modern Portfolio Theory and Investment Analysis Ethridge, D., Research Methodology in Applied Economics. 2 nd Ed. Ames: Blackwell Publishing. Herrick, J. A. Argumentation: Understanding and Shaping Arguments. Boston, Allyn and Bacon, 1995 Holme, I. M., & Solvang, B. K. (1997). Forskningsmetodik om kvalitativa och kvantitativa metoder (2:a uppl.). Lund: Studentlitteratur. Neale, B., McElroy, T. (2004, p ) Business Finance A Value-Based Approach. Dorchester: Pearson Education Limited Penman, S.H and Nissim, D. (2001). Ratio analysis and equity valuation: From research to practice. Columbia University, Graduate School of Business, 3022 Broadway, Uris Hall 604, New York, NY Pike, R., Neale, B. (2003) Corporate Finance and Investment Decisions and Strategies, (4 th edition). Madrid: Pearson Education Limited Pålsson Syll, L., Ekonomisk teori och metod. Lund: studentlitteratur. Ross, Westerfield and Jaffe (2008) Corporate Finance, 8 th edition Saunders, M., Lewis, P., & Thornhill, A., Research Methods for Business Students. Pearson Education Limited, Edinburgh. Thurén, T. Vetenskapsteori för nybörjare. Stockholm, Liber AB, 1998 Internet Sources Atlas copco 2011 a aspx Atlas copco 2011 b Ericsson 2011 a Ericsson 2011 b HM

71 facts.nhtml TeliaSonera Alfa Laval Theses Absiye, K. & Diking, J. (2001) Värdering av Unga Tillväxtbolag Risker, Värderingsmodeller och Värdegrundande Egenskaper, Unpublished Master Thesis, Kostnads- och intäktsanalys, Handelshögskolan vid Göteborgs Universitet Carlsson, M. & Dahlström, H.(2000) Company Valuation; a Case Study of Sandvik: Cash is King, Unpublished Bachelor s Thesis, Handelshögskolan vid universitetet I Göteborg Eixmann, L. & Österberg, J. (2000) Företagsvärdering med hjälp av Substansvärde, Kassaflöden och CAPM; en jämförelse av Modellernas Olika Egenskaper, Unpublished Master Thesis, Handelshögskolan vid Universitetet i Göteborg Olsson, O.K, Ribbing, J & Werner, M (2002) The Discounted Cash Flow Approach To Firm Valuation, A study with focus on forecasting. Master Thesis, Göteborg University Flöstrand, P Valuation Relevance. The use of Information and Choice of Method in Equity Valuation Olsson, F & Persson, M. (2009) Business Valuation, How to value private limited knowledge based companies. Published Master Thesis in Finance, Jönköping International Business School Annual Reports Alfa Laval Annual Report 2001 Alfa Laval Annual Report

72 Alfa Laval Annual Report 2003 Alfa Laval Annual Report 2004 Alfa Laval Annual Report 2005 Alfa Laval Annual Report 2010 Assa Abloy Annual Report 2001 Assa Abloy Annual Report 2002 Assa Abloy Annual Report 2003 Assa Abloy Annual Report 2004 Assa Abloy Annual Report 2005 Atlas Copco Annual Report 2001 Atlas Copco Annual Report 2002 Atlas Copco Annual Report 2003 Atlas Copco Annual Report 2004 Atlas Copco Annual Report 2005 Atlas Copco Annual Report 2010 Axfood Annual Report 2001 Axfood Annual Report 2002 Axfood Annual Report 2003 Axfood Annual Report 2004 Axfood Annual Report 2005 Boliden Annual Report 2001 Boliden Annual Report 2002 Boliden Annual Report 2003 Boliden Annual Report 2004 Boliden Annual Report 2005 Ericsson Annual Report 2001 Ericsson Annual Report 2002 Ericsson Annual Report 2003 Ericsson Annual Report 2004 Ericsson Annual Report 2005 Ericsson Annual Report 2010 H&M Annual Report 2001 H&M Annual Report 2002 H&M Annual Report 2003 H&M Annual Report 2004 H&M Annual Report 2005 H&M Annual Report 2010 Holmen Annual Report 2001 Holmen Annual Report 2002 Holmen Annual Report 2003 Holmen Annual Report 2004 Holmen Annual Report

73 TeliaSonera Annual Report 2001 TeliaSonera Annual Report 2002 TeliaSonera Annual Report 2003 TeliaSonera Annual Report 2004 TeliaSonera Annual Report 2005 Volvo Annual Report 2001 Volvo Annual Report 2002 Volvo Annual Report 2003 Volvo Annual Report 2004 Volvo Annual Report 2005 Volvo Annual Report

74 Appendices Appendix 1 Alfa Laval Profit & loss account Consolidated 31/12/ /12/ /12/ /12/ /12/2005 th SEK th SEK th SEK th SEK th SEK 12 months 12 months 12 months 12 months 12 months Local GAAP Local GAAP Local GAAP Local GAAP Local GAAP Operating revenue (Turnover) Sales Costs of goods sold Gross profit Other operating expenses Operating P/L [=EBIT] n.a Financial revenue Financial expenses Financial P/L P/L before tax n.a Taxation P/L after tax Extr. and other revenue n.a. n.a. n.a. n.a. 0 Extr. and other expenses n.a. n.a. n.a. n.a. 0 Extr. and other P/L n.a P/L for period [=Net income] n.a Appendix 2 Alfa Laval Growth Rate Operating revenue (Turnover) ,4% -4,8% 8,2% 8,4% Sales ,8% -4,7% 7,7% 9,0% Net Income n.a % 93% 154% 68

75 Appendix 3 Alfa Laval important data Year end Total assets Shareholders equity Cash Short-term debt Long-term debt Debt to total assets 0,93 0,91 0,70 0,66 0,63 0,64 Capital Expenditure Depreciation Change in WC WC No. Of Shares EPS (year end) 1,404 5,783 5,402 8,310 EPS (average) Shareholders Dividend Suggested DPS DPS 0 1, , , New issue Deduction Fusioner Share repurchase Payout ratio 0,35 0,74 0,57 69

76 Appendix 4 Alfa Laval Two-stage DDM Riskfree rate 3,37% Market Risk premium 5,50% Beta stable Growth 1,0623 Beta High Growth 1,0623 Cost of equity stable growth 9,21% Cost of equity high growth 9,21% Expected growth rate stable growth 2,50% Expected growth rate high growth 12,0% RoE stable growth Payout ratio Stable growth 0,9 High Growth Stage Expected Growth EPS PayoutratioDPS Cost of Equity Present Value 1 12,0% 9,31 0,57 5, ,21% 2 12,0% 10,42 0,57 5, ,21% 3 12,0% 11,68 0,57 6, ,21% 4 12,0% 13,08 0,57 7, ,21% 5 12,0% 14,65 0,57 8, ,21% 6 12,0% 16,40 0,57 9, ,21% 8, ,0% 18,37 0,57 10, ,21% 8, ,0% 20,58 0,57 11, ,21% 9, ,0% 23,04 0,57 13, ,21% 9, ,0% 25,81 0,57 14, ,21% 9, Terminal value 228,29 Value 273,46 Spit 4:1 68,37 Alfa laval made a stock split 4:1 70

77 Appendix 5 Alfa Laval Two-stage FCFE High Growth Net income Capital Expenditures Depreciation Change in WC Debt ratio FCFE FCFE 2001 n.a ,91 FCFE , FCFE , FCFE , FCFE , Future Predictions Expected growth Cost of Equity ,0% 9,21% ,0% 9,21% ,0% 9,21% ,0% 9,21% ,0% 9,21% ,0% 9,21% ,0% 9,21% ,0% 9,21% ,0% 9,21% ,0% 9,21% Future Growth in FCFE Discounted FCFE FCFE FCFE FCFE FCFE FCFE FCFE FCFE FCFE FCFE FCFE Terminal Value Stock Price 369 Split 4:1 92,24 Appendix 6 Date Company Target Price Credit Suisse 165 kr Lehman Brothers 180 kr Handelsbanken Capital markets 190 kr Danske Markets Equities 206 kr Handelsbanken Capital markets 230 kr 71

78 Appendix 7 Appendix 8 Assa Abloy Profit & loss account Consolidated 30/11/ /11/ /11/ /11/ /11/2005 th SEK th SEK th SEK th SEK th SEK 12 months 12 months 12 months 12 months 12 months Local GAAP Local GAAP Local GAAP Local GAAP Local GAAP Operating revenue (Turnover) Sales Costs of goods sold Gross profit Other operating expenses Operating P/L [=EBIT] Financial revenue Financial expenses Financial P/L P/L before tax Taxation P/L after tax Extr. and other revenue n.a. n.a. n.a. n.a. 0 Extr. and other expenses n.a. n.a. n.a. n.a. 0 Extr. and other P/L P/L for period [=Net income] Assa Abloy Growth Rate Operating revenue (Turnover) % 13% -5% 6% 8% Sales % 13% -5% 6% 9% Net Income % 34% -99% 16511% 75% 72

79 Appendix 9 Assa Abloy important data Year end Total assets Shareholders equity Cash Short-term debt Long-term debt Debt to total assets 0,57 0,64 0,62 0,64 0,64 0,57 Capital Expenditure Depreciation Change in WC wc No. Of Shares EPS (year end) 2,62 3,42 0,02 3,95 6,90 EPS (average) Shareholders Dividend Suggested DPS DPS 0,9 1 1,25 1,25 2,6 New issue Deduction Fusioner Share repurchase Payout ratio 0,34 0,29 51,52 0,32 0,38 73

80 Appendix 10 Assa Abloy two-stage DDM Riskfree rate 3,37% Market Risk premium 5,50% Beta stable Growth 0,8927 Beta High Growth 0,8927 Cost of equity stable growth 8,28% Cost of equity high growth 8,28% Expected growth rate stable growth 2,50% Expected growth rate high growth 8,3% RoE stable growth Payout ratio Stable growth 0,75 High Growth Stage Expected Growth EPS PayoutratioDPS Cost of Equity 1 8,3% 7,47 0,33 2, , ,3% 8,09 0,33 2, , ,3% 8,76 0,33 2, , ,3% 9,49 0,33 3, , ,3% 10,27 0,33 3, ,06552 Terminal value 136,65 Stock price 136,65 Appendix 11 Assa Abloy two-stage FCFE High Growth Net income Capital Expenditures Depreciation Change in WC Debt ratio FCFE FCFE , FCFE , FCFE , FCFE , FCFE , Future Predictions Expected growth Cost of Equity ,3% 8,28% ,3% 8,28% ,3% 8,28% ,3% 8,28% ,3% 8,28% Future Growth in FCFE Discounted FCFE FCFE FCFE FCFE FCFE FCFE Terminal Value Stock Price

81 Appendix 12 Date Company Target price SEB Enskilda 144 kr Credit Suisse 110 kr Morgan Stanley 112 kr Lehman Brothers 125 kr Danske Bank kr Handelsbanken Capital Markets 134 kr Appendix 13 Appendix 14 Atlas Copco Profit & loss account Consolidated 30/11/ /11/ /11/ /11/ /11/2005 th SEK th SEK th SEK th SEK th SEK 12 months 12 months 12 months 12 months 12 months Local GAAP Local GAAP Local GAAP Local GAAP Local GAAP Operating revenue (Turnover) Sales Costs of goods sold Gross profit Other operating expenses Operating P/L [=EBIT] Financial revenue n.a Financial expenses Financial P/L P/L before tax Taxation P/L after tax Extr. and other revenue n.a. n.a. n.a. 0 0 Extr. and other expenses n.a. n.a. n.a. 0 0 Extr. and other P/L P/L for period [=Net income] Atlas Copco Growth Rate Operating revenue (Turnover) % -7% -6% 8,9% 8,5% Sales % -7% -6% 9,0% 8% Net Income % -227% -184% 30% 55% 75

82 Appendix 15 Atlas Copco Year end Total assets Shareholders equity Cash Short-term debt Long-term debt Debt to total assets 0,61 0,57 0,58 0,54 0,53 0,53 Capital Expenditure Depreciation Change in WC wc No. Of Shares EPS (year end) 14,63-18,55 15,62 20,30 10,47 EPS (average) Shareholders Dividend Suggested DPS DPS 5,37 5,56 5,82 7,51 3,01 New issue Deduction Fusioner Shrae repurchase Payout ratio 0,37-0,30 0,37 0,37 0,29 76

83 Appendix 16 Atlas Copco Two-stage DDM Riskfree rate 3,37% Market Risk premium 5,50% Beta stable Growth 1,0532 Beta High Growth 1,266 Cost of equity stable growth 9,16% Cost of equity high growth 10,33% Expected growth rate stable growth 2,50% Expected growth rate high growth 9,0% RoE stable growth Payout ratio Stable growth 0,9 High Growth Stage Expected Growth EPS PayoutratioDPS Cost of Equity 1 9,0% 11,41 0,34 3, ,33% 2 9,0% 12,43 0,34 4, ,33% 3 9,0% 13,55 0,34 4, ,33% 4 9,0% 14,77 0,34 5, ,33% 5 9,0% 16,10 0,34 5, ,33% 6 9,0% 17,55 0,34 6, ,33% 7 9,0% 19,13 0,34 6, ,33% 8 9,0% 20,85 0,34 7, ,33% 9 9,0% 22,73 0,34 7, ,33% 10 9,0% 24,78 0,34 8, ,33% Terminal value 209,81 Stock price 236,47 Spit 2:1 118,23 In 2007 Atlas Copco made a stock split 2:1 77

84 Appendix 17 Atlas Copco Two-stage FCFE High Growth Net income Capital Expenditures Depreciation Change in WC Debt ratio FCFE FCFE , FCFE , FCFE , FCFE , FCFE , Future Predictions Expected growth Cost of Equity ,0% 10,33% ,0% 10,33% ,0% 10,33% ,0% 10,33% ,0% 10,33% ,0% 10,33% ,0% 10,33% ,0% 10,33% ,0% 10,33% ,0% 10,33% Future Growth in FCFE Discounted FCFE FCFE FCFE FCFE FCFE FCFE FCFE FCFE FCFE FCFE FCFE Terminal Value Stock Price 335 Split 2:1 167,64 Appendix 18 Date Company Target price Morgan Stanley 155 kr Lehman Brothers 200 kr Lehman Brothers 215 kr Bear Stearns 230 kr 78

85 Appendix 19 Axfood Amounts in SEK m Net sales Cost of goods sold Gross profit Selling expenses Administrative expenses Share of profit in associated companies Other operating income Other operating expenses Operating profit Interest income and similar profit/loss items Interest expense and similar profit/loss items Net financial items Profit before tax Current tax Deferred tax Net profit for the year Appendix 20 Axfood Growth rate Net Sales ,27% 2,12% 1,51% 0,62% -16,97% EBIT ,04% 56,66% 1,08% -2,51% 3,17% EBT #DIVISION/0! 74,38% 5,66% 0,93% 4,69% Net income ,71% 90,55% 9,44% -2,92% 9,79% 79

86 Appendix 21 Axfood important data Year end Total assets Shareholders equity Cash Short-term debt Long-term debt Debt to total assets 0,79 0,75 0,66 0,55 0,52 0,51 Capital Expenditure Depreciation Change in WC No. Of Shares EPS (year end) 6,16 11,74 12,79 12,39 13,37 EPS (average) 6,16 11,74 12,82 12,40 13,49 Shareholders Dividend Suggested DPS DPS 0,188 2,499 4,972 5,506 10,819 New issue Deduction Fusioner Share repurchase Payout ration 3,05% 21,28% 38,79% 44,39% 80,23% 80

87 Appendix 22 Axfood Three-stage DDM Riskfree rate assumed by Axfood 0,04 Riskfree rate (kvartal ) 0,03312 AA rating premium 0,01 Risk of Market Risk premium high growth 0,054 Market Risk premium stable growth 0,054 Beta 0,6 Cost of equity high growth 0,06552 Cost of equity stable growth 0,06552 Expected growth rate high growth 0,1 Expected growth rate Stable growth 0,025 RoE stable growth 0,12 Payout ratio Stable growth 0, Three stage dividend discount model High Growth Stage Expected GrowthEPS PayoutratioDPS Cost of Equity Present Value 1 10,0% 12, ,46 5, , ,0% 13, ,46 6, , ,0% 15,0273 0,46 6, , ,0% 16, ,46 7, , ,0% 18, ,46 8, ,06552 Transition Stage 6 8,5% 19, ,526 9, , , ,0% 21, ,592 9, , , ,5% 22, ,658 10, , , ,0% 23, ,724 10, , , ,5% 23, ,79 10, , , Stable Growth Terminal Price , , Stock Price 282,4 81

88 Appendix 23 Axfood Three-stage FCFE Net income Capital Expenditures Depreciation Change in WC Debt ratio FCFE FCFE ,75 398, FCFE ,66 418, FCFE ,55 423, FCFE ,52 592, FCFE ,51 470, Future predictions High Growth Stage Expected Growth EPS Payoutratio DPS Cost of Equity Present Value 1 10,00% 12,42 0,46 8,54 6,55% 7, ,00% 13,66 0,46 9,14 6,55% 7, ,00% 15,03 0,46 9,78 6,55% 7, ,00% 16,53 0,46 10,46 6,55% 7, ,00% 18,18 0,46 11,19 6,55% 7,89 Transition Stage - 6 8,50% 19,73 0,58 11,88 6,55% 7,81 7 7,00% 21,11 0,63 12,50 6,55% 7,66 8 5,50% 22,27 0,69 13,03 6,55% 7,45 9 4,00% 23,16 0,74 13,48 6,55% 7, ,50% 23,74 0,79 13,81 6,55% 6,87 Stable Growth Terminal Price ,87 Future Growth in FCFE Discounted FCFE FCFE ,14 FCFE ,86 FCFE ,64 FCFE ,01 FCFE ,51 FCFE ,51 696,85 FCFE ,62 709,59 FCFE ,02 712,57 FCFE ,43 705,54 FCFE ,80 688,64 Terminal value 969, ,23 Sum of PV FCFE 18309,43 Value of stock 335,76 Appendix 24 Date Company Target Price HQ Bank 240 kr Öhman 215 kr Handelsbanken Capital Markets 180 kr 82

89 Appendix 25 Boliden Profit & loss account 31/12/ /12/ /12/ /12/ /12/2005 Consolidated th SEK th SEK th SEK th SEK th SEK 12 months 12 months 12 months 12 months 12 months Local GAAP Local GAAP Local GAAP Local GAAP Local GAAP Operating revenue (Turnover) Sales Costs of goods sold Gross profit Other operating expenses Operating P/L [=EBIT] Financial revenue Financial expenses Financial P/L P/L before tax Taxation P/L after tax Extr. and other revenue n.a. n.a. n.a. n.a. 0 Extr. and other expenses n.a. n.a. n.a. n.a. 0 Extr. and other P/L P/L for period [=Net income] Appendix 26 Boliden Operating revenue (Turnover) % -6,09% -0,248% 90,04% 12,11% Sales % -6,77% -0,12% 87,83% 14,02% P/L for period [=Net income] % 106% -90,15% 8015,38% 93,93% 83

90 Appendix 27 Boliden Year end Total assets Shareholders equity Cash Short-term debt Long-term debt Debt to total assets 0, , , , , ,55105 Capital Expenditure Depreciation Change in WC Working Capital No. Of Shares EPS (year end) -26, , , , , EPS (average) Shareholders Dividend Suggested DPS DPS New issue Deduction Fusioner Share repurchase Payout ratio 0,28 84

91 Appendix 28 Boliden Two Stage-DDM Riskfree rate 3,37% Market Risk premium 0,055 Beta stable growth 1,29913 Beta high growth 1,9971 Cost of equity stable growth 10,52% Cost of equity high growth 14,35% Expected growth rate Stable growth 2,5% Expected growth rate high growth 19,1% RoE stable growth Payout ratio Stable growth 0,8 Dividned 2005 DPS 2005 DPs 2010 High Growth Stage Expected Growth EPS Payoutratio DPS Cost of Equity Present Value 1 19,1% 8,42 0,28 2,38 0,1435 5, ,1% 10,02 0,28 2,84 0, ,1% 11,94 0,28 3,38 0, ,1% 14,21 0,28 4,02 0, ,1% 16,93 0,28 4,79 0,1435 Terminal value 173,16 85

92 Appendix 29 Boliden Two-Stage FCFE High Growth Net income Capital Expenditures Depreciation Change in WC Debt ratio FCFE FCFE , FCFE , FCFE , FCFE , FCFE , Future Predictions Expected growth Cost of Equity ,1% 14,35% ,1% 14,35% ,1% 14,35% ,1% 14,35% ,1% 14,35% Future Growth in FCFE Discounted FCFE FCFE FCFE FCFE FCFE FCFE Terminal Value Calculated with a stable growth of 2,5% Stock Price 215 Appendix 30 Date Company Target Price SEB Enskilda 53 kr Kaupthing Bank 65 kr UBS 75 kr Kaupthing Bank 120 kr UBS 140 kr Handelsbanken Capital Markets 116 kr 86

93 Appendix 31 Ericsson Profit & loss account Consolidated 31/12/ /12/ /12/ /12/ /12/2005 th SEK th SEK th SEK th SEK th SEK 12 months 12 months 12 months 12 months 12 months Local GAAP Local GAAP Local GAAP Local GAAP Local GAAP Operating revenue (Turnover) Sales Costs of goods sold Gross profit Other operating expenses Operating P/L [=EBIT] Financial revenue Financial expenses Financial P/L P/L before tax Taxation P/L after tax Extr. and other revenue n.a. n.a. n.a. n.a. 0 Extr. and other expenses n.a. n.a. n.a. n.a. 0 Extr. and other P/L P/L for period [=Net income] Appendix 32 Ericsson Growth rate Operating revenue (Turnover) ,6% -20,3% 14,8% 14,5% Sales ,1% -19,2% 12,1% 15,0% Net Income ,6% 43,0% 275,4% 28,6% 87

94 Appendix 33 Ericsson important data Year end Total assets Shareholders equity Cash Short-term debt Long-term debt Debt to total assets 0,62 0,71 0,63 0,66 0,57 0,49 Capital Expenditure Depreciation Change in WC Noncash WC No. Of Shares EPS (year end) -2,6886-1,2018-0,6722 1,1793 1,5162 EPS (average) Shareholders Dividend Suggested DPS DPS 0,543 0,041 0,013 0,018 0,256 31% 142% 1415% New issue Deduction Fusioner Share repurchase Payout ratio -0,20-0,03-0,02 0,02 0,17 88

95 Appendix 34 Ericsson Two-stage DDM Riskfree rate 3,37% Market Risk premium 5,50% Beta stable Growth 0,7979 Beta High Growth 0,7979 Cost of equity stable growth 7,76% Cost of equity high growth 7,76% Expected growth rate stable growth 2,50% Expected growth rate high growth 2,5% RoE stable growth Payout ratio Stable growth 0,5 High Growth Stage Expected Growth EPS PayoutratioDPS Cost of Equity 1 2,5% 1,55 0,17 0, , ,5% 1,59 0,17 0, , ,5% 1,63 0,17 0, , ,5% 1,67 0,17 0, , ,5% 1,72 0,17 0, ,06552 Terminal value 16,72 Reverse spit 1:5 83,60 In june 2010 Ericsson made a reverse stock split 1:5 89

96 Appendix 35 High Growth Net income Capital Expenditures Depreciation Change in WC Debt ratio FCFE FCFE , FCFE , FCFE , FCFE , FCFE , Future Predictions Expected growth Cost of Equity ,5% 7,76% ,5% 7,76% ,5% 7,76% ,5% 7,76% ,5% 7,76% Future Growth in FCFE Discounted FCFE FCFE FCFE FCFE FCFE FCFE Ericsson Two-stage FCFE Terminal Value Stock Price 27 Reverse split 1:5 135,56 Appendix 36 Date Company Target price Handelsbanken Capital Markets 30 kr Evli Bank 35 kr Deutsche Bank 25 kr Kauping Bank 36 kr SG Equity Research 24 kr Morgan Stanley 32 kr 90

97 Appendix 37 H&M Profit & loss account Consolidated 30/11/ /11/ /11/ /11/ /11/2005 th SEK th SEK th SEK th SEK th SEK 12 months 12 months 12 months 12 months 12 months Local GAAP Local GAAP Local GAAP Local GAAP Local GAAP Operating revenue (Turnover) Sales Costs of goods sold n.a. n.a. n.a. n.a Gross profit n.a. n.a. n.a. n.a Other operating expenses n.a. n.a. n.a. n.a Operating P/L [=EBIT] Financial revenue Financial expenses Financial P/L P/L before tax Taxation P/L after tax Extr. and other revenue n.a. n.a. n.a. n.a. 0 Extr. and other expenses n.a. n.a. n.a. n.a. 0 Extr. and other P/L P/L for period [=Net income] Appendix 38 H&M Growth Rate Operating revenue (Turnover) % 15% 6% 11% 14% Sales % 15% 6% 11% 14% Net Income % 49% 12% 14% 27% 91

98 Appendix 39 H&M important data Year end Total assets Shareholders equity Cash Short-term debt Long-term debt Debt to total assets 0,24 0,24 0,24 0,22 0,21 0,22 Capital Expenditure Depreciation Change in WC wc No. Of Shares EPS (year end) 4,61 6,87 7,72 8,79 11,17 EPS (average) Shareholders Dividend Suggested DPS DPS 1,35 1, New issue Deduction Fusioner Share repurchase Payout ratio 0, , , , ,

99 Appendix 40 H&M Two-stage DDM Riskfree rate 3,37% Market Risk premium 5,50% Beta stable Growth 0,6291 Beta High Growth 0,6291 Cost of equity stable growth 6,83% Cost of equity high growth 6,83% Expected growth rate stable growth 2,50% Expected growth rate high growth 18,1% RoE stable growth Payout ratio Stable growth 0,75 High Growth Stage Expected Growth EPS PayoutratioDPS Cost of Equity 1 18,1% 13,20 0,54 7, , ,1% 15,58 0,54 8, , ,1% 18,40 0,54 10, , ,1% 21,73 0,54 11, , ,1% 25,67 0,54 13, ,06552 Terminal value 455,69 Spit 2:1 227,84 In june 2010 HM made a stock split 2:1 93

100 Appendix 41 High Growth Net income Capital Expenditures Depreciation Change in WC Debt ratio FCFE FCFE , FCFE , FCFE , FCFE , FCFE , Future Predictions Expected growth Cost of Equity ,1% 6,83% ,1% 6,83% ,1% 6,83% ,1% 6,83% ,1% 6,83% Future Growth in FCFE Discounted FCFE FCFE FCFE FCFE FCFE FCFE H&M Two-stage FCFE Terminal Value Stock Price 360 Split 2:1 179,77 Appendix 42 Date Company Target price Handelsbanken Capital Markets 330 kr Evli Bank 350 kr credit Suisse 200 kr Öhman 290 kr Morgan Stanley 320 kr Lehman Brothers 280 kr Handelsbanken Capital Markets 340 kr Carnegie 350 kr 94

101 Appendix 43 Profit & loss account Appendix 44 HOLMEN Consolidated 31/12/ /12/ /12/ /12/ /12/2005 th SEK th SEK th SEK th SEK th SEK 12 months 12 months 12 months 12 months 12 months Local GAAP Local GAAP Local GAAP Local GAAP Local GAAP Operating revenue (Turnover) Sales Costs of goods sold n.a. n.a. n.a. n.a. n.a. Gross profit n.a. n.a. n.a. n.a. n.a. Other operating expenses n.a. n.a. n.a. n.a. n.a. Operating P/L [=EBIT] Financial revenue n.a Financial expenses Financial P/L P/L before tax Taxation P/L after tax Extr. and other revenue n.a. n.a. n.a. n.a. 0 Extr. and other expenses n.a. n.a. n.a. n.a. 0 Extr. and other P/L P/L for period [=Net income] Holmen Growth Rate Operating revenue (Turnover) % -2,8% -2,0% -1,1% 6,3% Sales % -3,4% -1,6% -1,0% 4,3% P/L for period [=Net income] % -10,4% -25,9% -16,5% 3,7% 95

102 Appendix 45 Holmen important data Year end Total assets Shareholders equity Cash Short-term debt Long-term debt Debt to total assets 0, , , , , ,50039 Capital Expenditure Depreciation Change in WC Working Capital No. Of Shares EPS (year end) 27, , , , , EPS (average) Shareholders Dividend Suggested DPS DPS 68, , , , , New issue Deduction Fusioner Share repurchase Payout ration 2, , , , ,

103 Appendix 46 Holmen Gordon Growth Model Riskfree rate 3,37% Market Risk premium 0,055 Beta 0,7 Cost of equity stable growth 7,22% Expected growth rate Stable growth 2,5% RoE stable growth Payout ratio Stable growth Dividned DPS DPs ,32 Gordon Growth Model

104 Appendix 47 Holmen Free Cash Flow To Equity Net income Capital Expenditures Depreciation Change in WC Debt ratio FCFE FCFE , FCFE , FCFE , FCFE , FCFE , Future Predictions Expected Stable Growth Cost of Equity ,5% 7,22% ,5% 7,22% ,5% 7,22% ,5% 7,22% ,5% 7,22% Future Growth in FCFE Discounted FCFE FCFE FCFE FCFE FCFE FCFE Terminal Value Stock Price 483 Appendix 48 Date Company Target price Credit Suisse 236 kr Affärsvärlden 350 kr UBS 250 kr Handelsbanken Capital Markets 293 kr 98

105 Appendix 49 TeliaSonera Profit & loss account Consolidated 31/12/ /12/ /12/ /12/ /12/2005 th SEK th SEK th SEK th SEK th SEK 12 months 12 months 12 months 12 months 12 months Local GAAP Local GAAP Local GAAP Local GAAP Local GAAP Operating revenue (Turnover) Sales Costs of goods sold Gross profit Other operating expenses Operating P/L [=EBIT] Financial revenue n.a Financial expenses Financial P/L P/L before tax Taxation P/L after tax Extr. and other revenue n.a. n.a. n.a. n.a. 0 Extr. and other expenses n.a. n.a. n.a. n.a. 0 Extr. and other P/L P/L for period [=Net income] Appendix 50 TeliaSonera Growth rate Operating revenue (Turnover) ,0% 40,6% 0,4% 7,5% Sales ,0% 38,6% -0,6% 7,0% Net Income % 213% 43% 6% 99

106 Appendix 51 TeliaSonera important data Year end Total assets Shareholders equity Cash Short-term debt Long-term debt Debt to total assets 0,54 0,72 0,54 0,49 0,42 0,42 Capital Expenditure Depreciation Change in WC WC No. Of Shares EPS (year end) 0,612-1,752 1,942 2,311 3,050 EPS (average) Shareholders Dividend Suggested DPS DPS 0,5 0,1 0,4 1,0 1,2 New issue Deduction 0 Fusioner 0 Share repurchase Payout ratio 0,82-0,07 0,20 0,43 0,41 100

107 Appendix 52 TeliaSonera Gordon Growth Model Riskfree rate 3,37% Market Risk premium 0,055 Beta 0,6268 Cost of equity stable growth 6,82% Expected growth rate Stable growth 2,5% RoE stable growth Payout ratio Stable growth 0,6 Dividned DPS ,2 DPS Stock price 49,1 Appendix 53 TeliaSonera FCFE Net income Capital Expenditures Depreciation Change in WC Debt ratio FCFE FCFE , FCFE , FCFE , FCFE , FCFE , Future Predictions Expected Stable Growth Cost of Equity ,5% 7,22% ,5% 7,22% ,5% 7,22% ,5% 7,22% ,5% 7,22% Future Growth in FCFE Discounted FCFE FCFE FCFE FCFE FCFE FCFE Terminal Value Stock Price 75,1 101

108 Appendix 54 Date Company Target Price Handelsbanken Capital markets 45 kr Morgan Stanley 44,20 kr Deutshe Bank 45,50 kr Dresdner Kleinwort 46 kr Appendix 55 Volvo Profit & loss account Consolidated 31/12/ /12/ /12/ /12/ /12/2005 th SEK th SEK th SEK th SEK th SEK 12 months 12 months 12 months 12 months 12 months Local GAAP Local GAAP Local GAAP Local GAAP Local GAAP Operating revenue (Turnover) Sales Costs of goods sold Gross profit Other operating expenses Operating P/L [=EBIT] Financial revenue Financial expenses Financial P/L P/L before tax Taxation P/L after tax Extr. and other revenue n.a. n.a. n.a. n.a. 0 Extr. and other expenses n.a. n.a. n.a. n.a. 0 Extr. and other P/L P/L for period [=Net income]

109 Appendix 56 Volvo Growth rate Operating revenue (Turnover) % -2,4% -1,6% 15,3% 13,9% Sales % -1,6% -1,6% 14,8% 14,3% P/L for period [=Net income] % 95,0% -78,6% 3039,3% 39,5% Appendix 57 Volvo important data Year end Total assets Shareholders equity Cash Short-term debt Long-term debt Debt to total assets 0, , , , , , Capital Expenditure Depreciation Change in WC Working Capital No. Of Shares EPS (year end) -3, , , , , EPS (average) Shareholders Dividend Suggested DPS DPS 8, , , , , New issue Deduction Fusioner Share repurchase Payout ratio -2, , , , ,

110 Appendix 58 Volvo Gordon Growth Model Riskfree rate 3,37% Market Risk premium 0,055 Beta 1,5115 Cost of equity stable growth 11,7% Expected growth rate Stable growth 2,50% RoE stable growth Payout ratio Stable growth 0,8 Dividned DPS ,2 DPs ,6 EPS , Stock price 315,1 Split 5:1 63 Appendix 59 Volvo FCFE Net income Capital Expenditures Depreciation Change in WC Debt ratio FCFE FCFE , ,81 FCFE , ,5 FCFE , ,1 FCFE , ,7 FCFE , Future Predictions Expected Stable Growth Cost of Equity ,5% 11,7% ,5% 11,7% ,5% 11,7% ,5% 11,7% ,5% 11,7% Future Growth in FCFE FCFE ,51 FCFE FCFE FCFE FCFE Terminal Value Stock Price 436 Split 5:1 87,2 104

111 Appendix 60 Date Company Target price Evli Bank 385 kr Deutsche Bank 400 kr Credit Suisse 300 kr Kaupthing Bank 380 kr Appendix 61 % of actual SEK value Differation Alfa Laval Actual Stock price 141,7 Alfa Laval DDM Valuation 68,37 48,2% -51,8% Alfa Laval FCFE Valuation 92,24 65,1% -34,9% Assa Abloy Actual Stock price 189,5 Assa Abloy DDM Valuation 136, ,1% -27,9% Assa Abloy FCFE Valuation 139, ,9% -26,1% Atlas Copco Actual Stock price 169,7 Atlas Copco DDM Valuation 118, ,7% -30,3% Atlas Copco FCFE Valuation 167, ,8% -1,2% Axfood Actual Stock price 251,5 Axfood DDM Valuation 282, ,3% 12,3% Axfood FCFE Valuation 335, ,5% 33,5% Boliden Actual Stock price 136,7 Boliden DDM Valuation 173, ,7% 26,7% Boliden FCFE Valuation 215, ,3% 57,3% Ericsson Actual Stock price 78,15 Ericsson DDM Valuation 83,6 107,0% 7,0% Ericsson FCFE Valuation 135,56 173,5% 73,5% H&M Actual Stock price 224 H&M DDM Valuation 227, ,7% 1,7% H&M FCFE Valuation 179, ,3% -19,7% Holmen Actual Stock price 221,4 Holmen DDM Valuation 245, ,0% 11,0% Holmen FCFE Valuation 483, ,2% 118,2% TeliaSonera Actual Stock price 53,3 TeliaSonera DDM Valuation 49,1 92,1% -7,9% TeliaSonera FCFE Valuation 75,1 140,9% 40,9% Volvo Actual Stock price 118,5 Volvo DDM Valuation 63 53,2% -46,8% Volvo FCFE Valuation 87,2 73,6% -26,4% 105

112 106