Stock Price Valuation

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 2011-09-30

Master s Thesis within Finance Title: Authors: Tutor: Stock Price Valuation Anders Karlsson and Niklas Josefsson Urban Österlund Date: 2011-09-30 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.

Table of Contents 1 Introduction... 1 1.1 Background... 1 1.2 Problem Discussion... 3 1.3 Purpose... 4 1.4 Delimitation... 4 2 Theoretical Framework... 6 2.1 The Efficient Market Hypothesis... 6 2.1.1 Different types of Efficiency... 8 2.2 Discounted Cash Flow (DCF)... 9 2.3 Dividend Discount Model (DDM)... 10 2.3.1 Price of stock with zero growth dividends... 11 2.3.2 Price of stock with constant growth dividends (Gordon Growth Model)... 11 2.3.3 Price of stock at time N with constant growth dividends (Terminal Value)... 12 2.3.4 Two-stage Dividend Discount Model... 13 2.3.5 Three-stage Dividends Discount Model... 14 2.3.6 Modified Dividend Discount Model... 15 2.4 Equity Valuation... 16 2.5 Free Cash Flow to Equity Discount Models... 16 2.5.1 Cash to stockholders to FCFE ratio... 16 2.5.2 Constant Growth FCFE Model... 17 2.5.3 Two-stage FCFE Model... 17 2.5.4 Three-stage FCFE Model (E Model)... 18 2.6 Future Growth... 19 2.7 Previous Research... 21 3 Methodology... 24 3.1 Methodological Approach... 24 3.2 Outline of the Study... 24 3.3 The research process of the thesis... 25 3.4 Inductive vs. Deductive... 26 3.5 Qualitative vs. Quantitative... 27 3.6 Data Search... 28 3.7 Criticism of the Sources... 29 3.8 The Approach and Structure of the Thesis... 29 3.9 Validity and Reliability... 31 3.9.1 Validity... 31 3.9.2 Reliability... 32 3.10 Criticism of Method... 32 4 Empirical findings and Analysis... 34 4.1 Alfa Laval... 34 4.1.1 Assumptions... 34 4.1.2 Two-stage DDM... 35 4.1.3 Two-stage FCFE... 36 4.2 Assa Abloy... 37 i

4.2.1 Assumptions... 37 4.2.2 Two-stage DDM... 38 4.2.3 Two-stage FCFE... 38 4.3 Atlas Copco... 39 4.3.1 Assumptions... 39 4.3.2 Two-stage DDM... 40 4.3.3 Two-stage FCFE... 41 4.4 Axfood... 41 4.4.1 Assumptions... 41 4.4.2 3-stage DDM... 42 4.4.3 3-stage FCFE... 42 4.5 Boliden... 43 4.5.1 Assumptions... 43 4.5.2 Two-Stage DDM... 44 4.5.3 Two-Stage FCFE... 44 4.6 Ericsson... 45 4.6.1 Assumptions... 45 4.6.2 Two-stage DDM... 46 4.6.3 Two-stage FCFE... 47 4.7 H&M AB... 47 4.7.1 Assumptions... 48 4.7.2 Two-stage DDM... 49 4.7.3 Two-stage FCFE... 49 4.8 Holmen... 50 4.8.1 Assumptions... 50 4.8.2 Gordon Growth Model... 51 4.8.3 FCFE... 52 4.9 TeliaSonera... 52 4.9.1 Assumptions... 52 4.9.2 Gordon Growth Model... 53 4.9.3 FCFE... 54 4.10 Volvo... 54 4.10.1 Assumptions... 55 4.10.2 Gordon Growth Model... 55 4.10.3 FCFE... 56 5 Extended Analysis... 57 6 Conclusion... 60 7 Discussion and Reflections... 62 7.1 Future Studies... 62 8 References... 63 Appendices... 68 Appendix 1... 68 Appendix 2... 68 Appendix 3... 69 Appendix 4... 70 Appendix 5... 71 ii

Appendix 6... 71 Appendix 7... 72 Appendix 8... 72 Appendix 9... 73 Appendix 10... 74 Appendix 11... 74 Appendix 12... 75 Appendix 13... 75 Appendix 14... 75 Appendix 15... 76 Appendix 16... 77 Appendix 17... 78 Appendix 18... 78 Appendix 19... 79 Appendix 20... 79 Appendix 21... 80 Appendix 22... 81 Appendix 23... 82 Appendix 24... 82 Appendix 25... 83 Appendix 26... 83 Appendix 27... 84 Appendix 28... 85 Appendix 29... 86 Appendix 30... 86 Appendix 31... 87 Appendix 32... 87 Appendix 33... 88 Appendix 34... 89 Appendix 35... 90 Appendix 36... 90 Appendix 37... 91 Appendix 38... 91 Appendix 39... 92 Appendix 40... 93 Appendix 41... 94 Appendix 42... 94 Appendix 43... 95 Appendix 44... 95 Appendix 45... 96 Appendix 46... 97 Appendix 47... 98 Appendix 48... 98 Appendix 49... 99 Appendix 50... 99 Appendix 51... 100 Appendix 52... 101 Appendix 53... 101 Appendix 54... 102 iii

Appendix 55... 102 Appendix 56... 103 Appendix 57... 103 Appendix 58... 104 Appendix 59... 104 Appendix 60... 105 Appendix 61... 105 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... 10 Figure 5 The research process of the thesis... 25 Figure 6 Alfa Laval, Stock price valuation... 36 Figure 7 Assa Abloy, Stock price valuation... 38 Figure 8 Atlas Copco, Stock price valuation... 40 Figure 9 Axfood, Stock price valuation... 42 Figure 10 Boliden, Stock price valuation... 44 Figure 11 Ericsson, Stock price valuation... 46 Figure 12 H&M, Stock price valuation... 48 Figure 13 Holmen, Stock price valuation... 50 Figure 14 TeliaSonera, Stock price valuation... 53 Figure 15 Volvo, Stock price valuation... 55 Figure 16 Stock Prices... 58 Table 1 Sources used in the Study... 29 Table 2 Summarize of DDM and FCFE Valuations... 56 iv

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

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

2001-01-02 2001-04-02 2001-07-02 2001-10-02 2002-01-02 2002-04-02 2002-07-02 2002-10-02 2003-01-02 2003-04-02 2003-07-02 2003-10-02 2004-01-02 2004-04-02 2004-07-02 2004-10-02 2005-01-02 2005-04-02 2005-07-02 2005-10-02 400 350 300 250 200 150 100 50 0 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 2005. 1.2 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

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

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

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

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

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

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

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 314-315) 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

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 2.3.2 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

= 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). 2.3.3 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

= Steady state growth rate forever after year n 2.3.4 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

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

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). 2.3.6 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

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 2.5.1 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

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. 2.5.2 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 2.5.3 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

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 2.5.4 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

= 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

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

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

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

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

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

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

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

(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

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 2001-2005. Based on this data we will calculate our own predictions from year 2006-2010 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 www.di.se and www.riksbanken.se in order to find beta 28

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

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

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. 3.9.1 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

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. 3.10 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

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

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 1883. 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 2005. In 2005 Alfa Laval had about 9500 employees, with most employees in Sweden, Denmark, India, USA and France, Alfa Laval annual report 2005. 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. 4.1.1 Assumptions Alfa Laval showed a great increase both in net income and revenue over the years of 2001-2005. As seen in appendix 2 operating income increased by 8,2 percent and 8,4 percent in 2004 and 2005. 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 2002-2005 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

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 2005-12-31 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. 4.1.2 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 2001-2005 we still feel that this is a reasonable target price by the end of 2010. 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 2010-12-30 141,7 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

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 4.1.3 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 2006-2015. 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

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) 4.2.1 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 16511 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 2006-2010. 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 2008-12-31, 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 2001-2005, with the exclusion of 2003 where the payout ratio was 52,52, to a payout ratio 0,75 in the year of 2011. 37

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 2010-12-30. 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 4.2.3 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

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 27000 employees and revenue of 53 billion SEK, (Atlas Copco annual report 2005) 4.3.1 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 2001. 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 2003-2005 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 2005.. The beta value in high growth that we used is 1,266 which was the value on 2008-12-31, 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

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 2001-2005. When Atlas Copco matures we assume that the payout ratio will increase to 0,9. 4.3.2 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 2007. 236,47 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 2010-12-30. 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

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. (www.axfood.se). 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. 4.4.1 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 2001-2005 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 2015. 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 2006-2010 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 2005. Further they are working to make Axfood more cost effective for the future, Axfood årsredovisning 2005. 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

4.4.2 3-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 2010-12-30 where 251,5 kr. This is a bit higher than what HQ Bank valued Axfood in 2005-12-02, their target price was 240 SEK. The actual price of Alfa Laval on 2010-12-30 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 4.4.3 3-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

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 (www.boliden.com) 4.5.1 Assumptions We based our assumptions on the annual reports from 2001-2005, 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 2005. 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, (www.di.se). 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 1,29913. 43

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 2010-12-30 of 136,7 SEK. When UBS valuate Boliden in 2006-01-31 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 4.5.3 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

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. 4.6.1 Assumptions It is extra difficult to predict the future of Ericsson since it has changed so extremely over the years of 2001-2005. 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 2005. 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 2005. 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 2010. 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

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, 2010. 4.6.2 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 24-35 SEK as seen in appendix 36. The actual price of the Ericsson share was at closing 2005-12-30 78,15 but in this price we have to account for the reverse stock split 1:5 that Ericsson made between the years of 2006-2010, 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

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 4.6.3 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 2010-12-30 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 50000 people. H&M has as a goal a annual increase in stores of 10-15 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 2005. 47

4.7.1 Assumptions When valuing H&M we analyzed the growth in net income over the years 2001-2005 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 10-15 percent per year but also to increase sales at existing stores, H&M annual report 2005. 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 2005. 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 2006. 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 2005. 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

Finally we made an assumption about the payout ratio for H&M and that it will increase from the average between 2001-2005 of 0,55 to 0,75 in the low growth stage. 4.7.2 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 2006-2010 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 2010-12-30 that was 224kr. So the valuation only differed with 1,71 percent from the actual value. If we instead looked at an average of 2010-12-29, 2010-12-30 and 2011-01-03 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 4.7.3 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

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. (www.holmen.com) 4.8.1 Assumptions When analyzed Holmen we started by looking over the growth in net income from years 2001-2005, see appendix 44 for values. It is clear that the growth varies between the years 2001-2005, however between 2004-2005 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 2006-2010. Even considering that the growth over some years differed a lot see i.e. 2002-2003 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

When calculating cost of equity we used a beta of 0,7 according to Holmens annual report from 2005. Another assumption we made was that the relative high payout ratio of 0,67 will continue to stay at that level. 4.8.2 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 2006-01-02. We reached an assumed future price of 246 SEK with GGM which can be compared with the actual stock price in 2010-12-30 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 2004. (www.nasdaqomxnordic.com) Our stock price of 246 SEK with GGM can be compared to UBS target price in 2006-02-06 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

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 2006-02-06 their target price in 293 SEK, however Affärsvärldens came up with a higher target price in 2006-01-18 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. 4.9.1 Assumptions TeliaSonera growth has varied a lot over the years of 2001-2005, 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

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 2008-12-31 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. 4.9.2 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 2005-12-30 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

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 4.9.3 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. 4.10 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. (www.volvogroup.com) 54

4.10.1 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 2004. 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 2005. 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 2006-2010. 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 12-15 percent a year, but only managed to actually achieve an average of 6,4 percent between 2001 and 2005. 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 2008-12-31, based on this we got a cost of equity of 11,7%. 4.10.2 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 2006-01-02. With this data we reached a future stock price of 63 SEK which can be compared to actual stock 55

price of 118,5 SEK in 2010-12.30. 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 2006-02-07 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 4.10.3 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 2006-05-01, 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

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 0,784203 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

panies that paid out the least dividend in 2005. 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 2005. These 5 companies had a dividend pay-out ratio off between 41% and 80% in 2005. 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

Datum 2006-03-09 2006-05-22 2006-08-02 2006-10-10 2006-12-18 2007-02-28 2007-05-11 2007-07-24 2007-10-01 2007-12-07 2008-02-21 2008-05-05 2008-07-15 2008-09-22 2008-11-28 2009-02-13 2009-04-27 2009-07-08 2009-09-15 2009-11-23 2010-02-05 2010-04-19 2010-06-29 2010-09-06 2010-11-12 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. 700 600 500 400 300 200 100 0 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

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

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

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

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http://www.hm.com/se/omhm/faktaomhm facts.nhtml 2011-05-02 TeliaSonera 2011 http://teliasonera.com/en/about-teliasonera/teliasonera-group/our-history/ 2011-05-07 Alfa Laval 2011 http://local.alfalaval.com/en-us/about-us/pages/default.aspx 2011-05-09 www.di.se http://www.nasdaqomxnordic.com/nordic/nordic.aspx www.riksbanken.se 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. 2006. 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 2002 65

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 2005 66

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 2010 67

Appendices Appendix 1 Alfa Laval Profit & loss account Consolidated 31/12/2001 31/12/2002 31/12/2003 31/12/2004 31/12/2005 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) 16218700 14864000 14151700 15311000 16 602 500 Sales 15829600 14595000 13909300 14985800 16 330 400 Costs of goods sold 10348000 9450000 8976300 9937000 10 800 400 Gross profit 5870700 5414000 5175400 5374000 5 530 000 Other operating expenses 4639200 4194000 4036900 4127100 4 424 900 Operating P/L [=EBIT] n.a. 1220000 1138500 1246900 1 377 200 Financial revenue 247500 360000 274400 169500 178 500 Financial expenses 1437200 902000 595500 346300 368 200 Financial P/L -1189700-542000 -321100-176800 -189 700 P/L before tax n.a. 372000 817400 1070100 1 099 000 Taxation -26300 218000 130000 421500 171 000 P/L after tax 26300 154000 687400 648600 928 000 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. -34000-41600 -45400 0 P/L for period [=Net income] n.a. 120000 645800 603200 928 000 Appendix 2 Alfa Laval Growth Rate 2001 2002 2003 2004 2005 Operating revenue (Turnover) 16 218 700 14 864 000 14 151 700 15 311 000 16 602 500-8,4% -4,8% 8,2% 8,4% Sales 15 829 600 14 595 000 13 909 300 14 985 800 16 330 400-7,8% -4,7% 7,7% 9,0% Net Income n.a. 120 000 645 800 603 200 928 000 538% 93% 154% 68

Appendix 3 Alfa Laval important data Year end 2000 2001 2002 2003 2004 2005 Total assets 18602000 17631800 15427000 14689500 13901000 16206400 Shareholders equity Cash Short-term debt 5083000 4751600 3873000 3733500 4010300 5716500 Long-term debt 12200000 11303100 6933000 5954800 4804500 4678500 Debt to total assets 0,93 0,91 0,70 0,66 0,63 0,64 Capital Expenditure 258100 3043900 380200 85000 725200 Depreciation 315000 912200 811000 787200 745800 579500 Change in WC -196600-773400 312800-238300 -428000 WC 3986000 3789400 3016000 3328800 3090500 2662500 No. Of Shares 37 496 325 85 482 322 111 671 992 111 671 993 111 671 993 EPS (year end) 1,404 5,783 5,402 8,310 EPS (average) Shareholders Dividend 223 300 000 446 700 000 530 400 000 Suggested DPS DPS 0 1,999606132 4,000107708 4,749624196 New issue 3 136 600 000 Deduction Fusioner Share repurchase Payout ratio 0,35 0,74 0,57 69

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 5,319579 9,21% 2 12,0% 10,42 0,57 5,957929 9,21% 3 12,0% 11,68 0,57 6,67288 9,21% 4 12,0% 13,08 0,57 7,473626 9,21% 5 12,0% 14,65 0,57 8,370461 9,21% 6 12,0% 16,40 0,57 9,374916 9,21% 8,584093495 7 12,0% 18,37 0,57 10,49991 9,21% 8,803178675 8 12,0% 20,58 0,57 11,75989 9,21% 9,027855395 9 12,0% 23,04 0,57 13,17108 9,21% 9,258266367 10 12,0% 25,81 0,57 14,75161 9,21% 9,494557939 Terminal value 228,29 Value 273,46 Spit 4:1 68,37 Alfa laval made a stock split 4:1 70

Appendix 5 Alfa Laval Two-stage FCFE High Growth Net income Capital Expenditures Depreciation Change in WC Debt ratio FCFE FCFE 2001 n.a. 258 100 912200-196600 0,91 FCFE 2002 120000 3 043 900 811000-773400 0,70-317178 FCFE 2003 645800 380 200 787200 312800 0,66 677871 FCFE 2004 603200 85 000 745800-238300 0,63 932169 FCFE 2005 928 000 725 200 579500-428000 0,64 1029229 Future Predictions Expected growth Cost of Equity 2006 12,0% 9,21% 2007 12,0% 9,21% 2008 12,0% 9,21% 2009 12,0% 9,21% 2010 12,0% 9,21% 2011 12,0% 9,21% 2012 12,0% 9,21% 2013 12,0% 9,21% 2014 12,0% 9,21% 2015 12,0% 9,21% Future Growth in FCFE Discounted FCFE FCFE 2006 1152737 FCFE 2007 1291065 FCFE 2008 1445993 FCFE 2009 1619512 FCFE 2010 1813853 FCFE 2011 2031516 1860147 FCFE 2012 2275297 1907622 FCFE 2013 2548333 1956309 FCFE 2014 2854133 2006238 FCFE 2015 3196629 2057442 Terminal Value 48811496 31416470 Stock Price 369 Split 4:1 92,24 Appendix 6 Date Company Target Price 2005-12-14 Credit Suisse 165 kr 2006-01-13 Lehman Brothers 180 kr 2006-01-16 Handelsbanken Capital markets 190 kr 2006-02-10 Danske Markets Equities 206 kr 2006-03-06 Handelsbanken Capital markets 230 kr 71

Appendix 7 Appendix 8 Assa Abloy Profit & loss account Consolidated 30/11/2001 30/11/2002 30/11/2003 30/11/2004 30/11/2005 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) 22656700 25515800 24260000 25707000 27838000 Sales 22510000 25396900 24080000 25526000 27802000 Costs of goods sold 13863100 15525900 14613000 15148000 16508000 Gross profit 8793600 9989900 9647000 10559000 11294000 Other operating expenses 6660800 7352000 8574000 7789000 7252000 Operating P/L [=EBIT] 2132800 2637900 1073000 2770000 4078000 Financial revenue 2793900 237700 231000 194000 51000 Financial expenses 3451100 860600 721000 670000 573000 Financial P/L -657200-622900 -490000-476000 -522000 P/L before tax 1475600 2015000 583000 2294000 3556000 Taxation 507400 689100 556000 792000 943000 P/L after tax 968200 1325900 27000 1502000 2613000 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 -19600-56000 -18000-7000 0 P/L for period [=Net income] 948600 1269900 9000 1495000 2613000 Assa Abloy Growth Rate 2 001 2 002 2 003 2 004 2 005 Operating revenue (Turnover) 22 656 700 25 515 800 24 260 000 25 707 000 27 838 000 % 13% -5% 6% 8% Sales 22 510 000 25 396 900 24 080 000 25 526 000 27 802 000 % 13% -5% 6% 9% Net Income 948 600 1 269 900 9 000 1 495 000 2 613 000 % 34% -99% 16511% 75% 72

Appendix 9 Assa Abloy important data Year end 2000 2001 2002 2003 2004 2005 Total assets 26097200 34669000 33260600 29827000 29322000 33692000 Shareholders equity Cash Short-term debt 5594600 8763100 9785900 8198000 10185000 13522000 Long-term debt 9215500 13578600 10762600 10935000 8662000 5757000 Debt to total assets 0,57 0,64 0,62 0,64 0,64 0,57 Capital Expenditure 1 040 200 384 800-2 018 100-219 000 3 938 000 Depreciation 1721100 1907100 1856000 1872000 882000 Change in WC -1061500-1593900 404100-1789000 -2028000 wc 2901300 1839800 245900 650000-1139000 -3 167 000 No. Of Shares 356 730 000 361 730 000 370 935 000 370 935 000 378 718 000 378 718 000 EPS (year end) 2,62 3,42 0,02 3,95 6,90 EPS (average) Shareholders Dividend 325 557 000 370 935 000 463 668 750 473 397 500 984 666 800 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

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 2,482013 0,06552 2 8,3% 8,09 0,33 2,687762 0,06552 3 8,3% 8,76 0,33 2,910565 0,06552 4 8,3% 9,49 0,33 3,151839 0,06552 5 8,3% 10,27 0,33 3,413113 0,06552 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 2001 948600 1 040 200 1721100-1061500 0,64 1568147 FCFE 2002 1269900 384 800 1907100-1593900 0,62 2460902 FCFE 2003 9000-2 018 100 1856000 404100 0,64 1253114 FCFE 2004 1495000-219 000 1872000-1789000 0,64 2881092 FCFE 2005 2613000 3 938 000 882000-2028000 0,57 2173235 Future Predictions Expected growth Cost of Equity 2006 8,3% 8,28% 2007 8,3% 8,28% 2008 8,3% 8,28% 2009 8,3% 8,28% 2010 8,3% 8,28% Future Growth in FCFE Discounted FCFE FCFE 2006 2353387 FCFE 2007 2548472 FCFE 2008 2759730 FCFE 2009 2988500 FCFE 2010 3236233 Terminal Value 57391443 53002884 Stock Price 140 74

Appendix 12 Date Company Target price 2005-11-02 SEB Enskilda 144 kr 2005-11-18 Credit Suisse 110 kr 2006-02-10 Morgan Stanley 112 kr 2006-02-13 Lehman Brothers 125 kr 2006-02-13 Danske Bank 140-150 kr 2006-02-15 Handelsbanken Capital Markets 134 kr Appendix 13 Appendix 14 Atlas Copco Profit & loss account Consolidated 30/11/2001 30/11/2002 30/11/2003 30/11/2004 30/11/2005 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) 51340000 47773000 44842000 48817000 52975000 Sales 51139000 47562000 44619000 48654000 52742000 Costs of goods sold 35134000 32803000 30640000 32837000 33971000 Gross profit 16206000 14970000 14202000 15817000 18771000 Other operating expenses 10076000 16659000 8892000 9280000 9601000 Operating P/L [=EBIT] 6130000-1689000 5310000 6700000 9403000 Financial revenue 164000 311000 n.a. 495000 577000 Financial expenses 1594000 1091000 397000 601000 680000 Financial P/L -1430000-780000 -397000-106000 -103000 P/L before tax 4700000-2469000 4913000 6380000 9300000 Taxation 1622000 1361000 1619000 2112000 2936000 P/L after tax 3078000-3830000 3294000 4268000 6364000 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 -11000-59000 -20000 0 0 P/L for period [=Net income] 3067000-3889000 3274000 4254000 6581000 Atlas Copco Growth Rate 2 001 2 002 2 003 2 004 2 005 Operating revenue (Turnover) 51 340 000 47 773 000 44 842 000 48 817 000 52 975 000 % -7% -6% 8,9% 8,5% Sales 51 139 000 47 562 000 44 619 000 48 654 000 52 742 000 % -7% -6% 9,0% 8% Net Income 3 067 000-3 889 000 3 274 000 4 254 000 6 581 000 % -227% -184% 30% 55% 75

Appendix 15 Atlas Copco Year end 2000 2001 2002 2003 2004 2005 Total assets 61688000 64357000 48668000 45862000 47222000 54955000 Shareholders equity Cash Short-term debt 19359000 18032000 10811000 11679000 11295000 15699000 Long-term debt 18128000 18536000 17503000 13115000 13595000 13448000 Debt to total assets 0,61 0,57 0,58 0,54 0,53 0,53 Capital Expenditure 3 588 000-7 435 000 714 000 1 264 000 3 476 000 Depreciation 4556000 683276 85000 688000 3320000 Change in WC 1623000 5978000 1158000 1538000-705000 wc -720000 903000 6881000 8039000 9577000 8872000 No. Of Shares 209 602 184 209 602 184 209 602 184 209 602 184 628 806 553 EPS (year end) 14,63-18,55 15,62 20,30 10,47 EPS (average) Shareholders Dividend 1 125 000 000 1 165 000 000 1 219 000 000 1 575 000 000 1 890 000 000 Suggested DPS DPS 5,37 5,56 5,82 7,51 3,01 New issue Deduction Fusioner Shrae repurchase 4192000000 Payout ratio 0,37-0,30 0,37 0,37 0,29 76

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 3,915751 10,33% 2 9,0% 12,43 0,34 4,268169 10,33% 3 9,0% 13,55 0,34 4,652304 10,33% 4 9,0% 14,77 0,34 5,071011 10,33% 5 9,0% 16,10 0,34 5,527402 10,33% 6 9,0% 17,55 0,34 6,024868 10,33% 7 9,0% 19,13 0,34 6,567107 10,33% 8 9,0% 20,85 0,34 7,158146 10,33% 9 9,0% 22,73 0,34 7,802379 10,33% 10 9,0% 24,78 0,34 8,504594 10,33% Terminal value 209,81 Stock price 236,47 Spit 2:1 118,23 In 2007 Atlas Copco made a stock split 2:1 77

Appendix 17 Atlas Copco Two-stage FCFE High Growth Net income Capital Expenditures Depreciation Change in WC Debt ratio FCFE FCFE 2001 3067000 3 588 000 4556000 1623000 0,57 2784175 FCFE 2002-3889000 -7 435 000 683276 5978000 0,58-2993891 FCFE 2003 3274000 714 000 85000 1158000 0,54 2453091 FCFE 2004 4254000 1 264 000 688000 1538000 0,53 3254257 FCFE 2005 6581000 3 476 000 3320000-705000 0,53 6838822 Future Predictions Expected growth Cost of Equity 2006 9,0% 10,33% 2007 9,0% 10,33% 2008 9,0% 10,33% 2009 9,0% 10,33% 2010 9,0% 10,33% 2011 9,0% 10,33% 2012 9,0% 10,33% 2013 9,0% 10,33% 2014 9,0% 10,33% 2015 9,0% 10,33% Future Growth in FCFE Discounted FCFE FCFE 2006 7454316 FCFE 2007 8125204 FCFE 2008 8856472 FCFE 2009 9653555 FCFE 2010 10522375 FCFE 2011 11469389 10395248 FCFE 2012 12501634 11330820 FCFE 2013 13626781 12350594 FCFE 2014 14853191 13462147 FCFE 2015 16189978 14673740 Terminal Value 249072848 148619360 Stock Price 335 Split 2:1 167,64 Appendix 18 Date Company Target price 2005-12-05 Morgan Stanley 155 kr 2006-01-13 Lehman Brothers 200 kr 2006-02-03 Lehman Brothers 215 kr 2006-02-03 Bear Stearns 230 kr 78

Appendix 19 Axfood Amounts in SEK m 2001 2002 2003 2004 2005 Net sales 32428 33115 33616 33826 28 086 Cost of goods sold -28425-28612 -29721-29748 -24172 Gross profit 4003 4503 3895 4078 3914 Selling expenses -2331-2472 -2015-2056 -1879 Administrative expenses -1140-1215 -1144-1187 -1158 Share of profit in associated companies 21 32 10 3 4 Other operating income 179 175 302 195 193 Other operating expenses -14-25 -21 Operating profit 653 1023 1034 1008 1040 Interest income and similar profit/loss items 15 20 16 18 11 Interest expense and similar profit/loss items -141-124 -79-46 -25 Net financial items -126-104 -63-28 -14 Profit before tax 527 919 971 980 1026 Current tax -144-242 -215-254 -576 Deferred tax -38-44 -60-58 279 Net profit for the year 328 625 684 664 729 Appendix 20 Axfood Growth rate 2001 2002 2003 2004 2005 Net Sales 32428 33115 33616 33826 28086 7,27% 2,12% 1,51% 0,62% -16,97% EBIT 653 1023 1034 1008 1040 483,04% 56,66% 1,08% -2,51% 3,17% EBT 527 919 971 980 1026 #DIVISION/0! 74,38% 5,66% 0,93% 4,69% Net income 328 625 684 664 729-1064,71% 90,55% 9,44% -2,92% 9,79% 79

Appendix 21 Axfood important data Year end 2000 2001 2002 2003 2004 2005 Total assets 7585 7767 7355 6977 7220 7569 Shareholders equity 1208 1693 2127 2763 2944 Cash 406 353 346 977 639 Short-term debt 4184 4616 3955 3 641 3 427 3 323 Long-term debt 1821 1197 887 186 344 540 Debt to total assets 0,79 0,75 0,66 0,55 0,52 0,51 Capital Expenditure 374 559 637 299 257 Depreciation 518 496 552 599 467 Change in WC -138 540 492 449 737 No. Of Shares 53229028 53229028 53 497 028 53 577 828 54 531 378 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 10 133 266 295 590 Suggested DPS 2.50 5 5.50 5.50 15 DPS 0,188 2,499 4,972 5,506 10,819 New issue 10 0 20 6 70 Deduction 0 0 0 0 0 Fusioner 0 0 12 0 0 Share repurchase 0 0 0 0 0 Payout ration 3,05% 21,28% 38,79% 44,39% 80,23% 80

Appendix 22 Axfood Three-stage DDM Riskfree rate assumed by Axfood 0,04 Riskfree rate (kvartal 4 2005) 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 0,791666667 Three stage dividend discount model High Growth Stage Expected GrowthEPS PayoutratioDPS Cost of Equity Present Value 1 10,0% 12,41925 0,46 5,712857 0,06552 2 10,0% 13,66118 0,46 6,284143 0,06552 3 10,0% 15,0273 0,46 6,912557 0,06552 4 10,0% 16,53003 0,46 7,603813 0,06552 5 10,0% 18,18303 0,46 8,364194 0,06552 Transition Stage 6 8,5% 19,72859 0,526 9,075151 0,06552 6,201320987 7 7,0% 21,10959 0,592 9,710411 0,06552 6,227394564 8 5,5% 22,27062 0,658 10,24448 0,06552 6,16591079 9 4,0% 23,16144 0,724 10,65426 0,06552 6,018232621 10 2,5% 23,74048 0,79 10,92062 0,06552 5,78936898 Stable Growth Terminal Price 10 475,4296307 252,040415 Stock Price 282,4 81

Appendix 23 Axfood Three-stage FCFE Net income Capital Expenditures Depreciation Change in WC Debt ratio FCFE FCFE 2001 328 374 518-138 0,75 398,9447663 FCFE 2002 625 559 496 540 0,66 418,971584 FCFE 2003 684 637 552 492 0,55 423,4940519 FCFE 2004 664 299 599 449 0,52 592,8225762 FCFE 2005 729 257 467 737 0,51 470,9656494 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% 7,96 2 10,00% 13,66 0,46 9,14 6,55% 7,95 3 10,00% 15,03 0,46 9,78 6,55% 7,93 4 10,00% 16,53 0,46 10,46 6,55% 7,91 5 10,00% 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% 7,18 10 2,50% 23,74 0,79 13,81 6,55% 6,87 Stable Growth Terminal Price 11 448,87 Future Growth in FCFE Discounted FCFE FCFE 2006 507,14 FCFE 2007 557,86 FCFE 2008 613,64 FCFE 2009 675,01 FCFE 2010 742,51 FCFE 2011 742,51 696,85 FCFE 2012 805,62 709,59 FCFE 2013 862,02 712,57 FCFE 2014 909,43 705,54 FCFE 2015 945,80 688,64 Terminal value 969,45 14796,23 Sum of PV FCFE 18309,43 Value of stock 335,76 Appendix 24 Date Company Target Price 2005-12-02 HQ Bank 240 kr 2006-02-06 Öhman 215 kr 2006-02-06 Handelsbanken Capital Markets 180 kr 82

Appendix 25 Boliden Profit & loss account 31/12/2001 31/12/2002 31/12/2003 31/12/2004 31/12/2005 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) 10302000 9675000 9651000 18341000 20563000 Sales 10250000 9556000 9545000 17928000 20441000 Costs of goods sold 9686000 8569000 8507000 15563000 16486000 Gross profit 616000 1106000 1144000 2778000 3955000 Other operating expenses 1565000 692000 1163000 1112000 1008000 Operating P/L [=EBIT] -949000 414000-19000 1666000 3069000 Financial revenue 50000 48000 69000 35000 26000 Financial expenses 2857000 351000 301000 501000 283000 Financial P/L -2807000-303000 -232000-466000 -257000 P/L before tax -3756000 111000-251000 1200000 2812000 Taxation -562000-20000 -265000 145000 766000 P/L after tax -3194000 131000 14000 1055000 2046000 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 957000 1000-1000 0 0 P/L for period [=Net income] -2237000 132000 13000 1055000 2046000 Appendix 26 Boliden 2001 2002 2003 2004 2005 Operating revenue (Turnover) 10302000 9675000 9651000 18341000 20563000 % -6,09% -0,248% 90,04% 12,11% Sales 10250000 9556000 9545000 17928000 20441000 % -6,77% -0,12% 87,83% 14,02% P/L for period [=Net income] -2237000 132000 13000 1055000 2046000 % 106% -90,15% 8015,38% 93,93% 83

Appendix 27 Boliden Year end 2000 2001 2002 2003 2004 2005 Total assets 12 057 000 11 176 000 10 694 000 19 861 000 20 017 000 22 918 000 Shareholders equity Cash Short-term debt 3 539 000 7 453 000 2 038 000 3 906 000 2 905 000 5 848 000 Long-term debt 8 432 000 1 195 000 6 065 000 9 855 000 8 153 000 6 781 000 Debt to total assets 0,99287 0,77380 0,75771 0,69287 0,55243 0,55105 Capital Expenditure 2 442 000 63 000 3 509 000 2 859 000 1 330 000 Depreciation 986 000 837 000 519 000 652 000 1 311 000 1 229 000 Change in WC -4 303 000 5 050 000 421 000 914 000-548 000 Working Capital -38 000-4 341 000 709 000 1 130 000 2 044 000 1 496 000 No. Of Shares 85811638 85811638 168258113 289387169 289387169 EPS (year end) -26,06873 1,5382529 0,07726225 3,64563503 7,07011305 EPS (average) Shareholders Dividend 0 0 0 0 578774338 Suggested DPS DPS 0 0 0 0 2 New issue Deduction Fusioner Share repurchase Payout ratio 0,28 84

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 5,458895 2 19,1% 10,02 0,28 2,84 0,1435 3 19,1% 11,94 0,28 3,38 0,1435 4 19,1% 14,21 0,28 4,02 0,1435 5 19,1% 16,93 0,28 4,79 0,1435 Terminal value 173,16 85

Appendix 29 Boliden Two-Stage FCFE High Growth Net income Capital Expenditures Depreciation Change in WC Debt ratio FCFE FCFE 2001-2237000 2 442 000 837000-4303000 0,77-1626715 FCFE 2002 132000 63 000 519000 5050000 0,76-981059 FCFE 2003 13000 3 509 000 652000 421000 0,69-993787 FCFE 2004 1055000 2 859 000 1311000 914000 0,55-46916 FCFE 2005 2046000 1 330 000 1229000-548000 0,55 2246680 Future Predictions Expected growth Cost of Equity 2006 19,1% 14,35% 2007 19,1% 14,35% 2008 19,1% 14,35% 2009 19,1% 14,35% 2010 19,1% 14,35% Future Growth in FCFE Discounted FCFE FCFE 2006 2675252 FCFE 2007 3185579 FCFE 2008 3793254 FCFE 2009 4516848 FCFE 2010 5378473 Terminal Value 68780872 62236564 Calculated with a stable growth of 2,5% Stock Price 215 Appendix 30 Date Company Target Price 2005-11-18 SEB Enskilda 53 kr 2005-12-15 Kaupthing Bank 65 kr 2006-01-03 UBS 75 kr 2006-01-26 Kaupthing Bank 120 kr 2006-01-31 UBS 140 kr 2006-02-08 Handelsbanken Capital Markets 116 kr 86

Appendix 31 Ericsson Profit & loss account Consolidated 31/12/2001 31/12/2002 31/12/2003 31/12/2004 31/12/2005 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) 240 046 000 149 746 000 119 279 000 136 907 000 156 707 000 Sales 231 839 000 145 773 000 117 738 000 131 972 000 151 821 000 Costs of goods sold 173 900 000 104 224 000 78 901 000 70 864 000 82 369 000 Gross profit 66 146 000 45 522 000 40 378 000 66 043 000 69 452 000 Other operating expenses 92 519 000 66 821 000 51 617 000 37 105 000 41 254 000 Operating P/L [=EBIT] -26 373 000-21 299 000-11 239 000 28 938 000 33 084 000 Financial revenue 3 022 000 4 253 000 3 995 000 3 541 000 2 653 000 Financial expenses 5 782 000 5 789 000 4 859 000 4 081 000 2 402 000 Financial P/L -2 760 000-1 536 000-864 000-540 000 251 000 P/L before tax -29 133 000-22 835 000-12 103 000 28 398 000 33 335 000 Taxation -9 045 000-4 310 000-1 460 000 9 077 000 8 875 000 P/L after tax -20 088 000-18 525 000-10 643 000 19 321 000 24 460 000 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 -1 176 000-488 000-201 000-297 000 0 P/L for period [=Net income] -21 264 000-19 013 000-10 844 000 19 024 000 24 460 000 Appendix 32 Ericsson Growth rate 2 001 2 002 2 003 2 004 2 005 Operating revenue (Turnover) 240 046 000 149 746 000 119 279 000 136 907 000 156 707 000-37,6% -20,3% 14,8% 14,5% Sales 231 839 000 145 773 000 117 738 000 131 972 000 151 821 000-37,1% -19,2% 12,1% 15,0% Net Income -21 264 000-19 013 000-10 844 000 19 024 000 24 460 000 10,6% 43,0% 275,4% 28,6% 87

Appendix 33 Ericsson important data Year end 2 000 2 001 2 002 2 003 2 004 2 005 Total assets 250 314 000 250 056 000 208 267 000 182 372 000 183 040 000 208 829 000 Shareholders equity Cash Short-term debt 105 920 000 91 632 000 62 771 000 53 752 000 45 705 000 81 957 000 Long-term debt 49 944 000 86 305 000 69 420 000 65 840 000 58 979 000 21 345 000 Debt to total assets 0,62 0,71 0,63 0,66 0,57 0,49 Capital Expenditure -22 331 000 3 957 000-13 296 000 15 576 000 27 171 000 Depreciation 9 781 000 7 149 000 6 531 000 4 740 000 6 073 000 Change in WC 9 834 000-23 825 000-3 894 000 15 178 000-14 985 000 Noncash WC 93 888 000 103 722 000 79 897 000 76 003 000 91 181 000 76 196 000 No. Of Shares 7 909 000 000 15 820 000 000 16 132 258 678 16 132 258 678 16 132 258 678 EPS (year end) -2,6886-1,2018-0,6722 1,1793 1,5162 EPS (average) 4 296 000 000-28 297 000 000 198 000 000 277 000 000 4 016 000 000 Shareholders Dividend 4 295 000 000 645 000 000 206 000 000 292 000 000 4 133 000 000 Suggested DPS DPS 0,543 0,041 0,013 0,018 0,256 31% 142% 1415% New issue 155 000 000 28 940 000 000 158 000 000 0 0 Deduction Fusioner Share repurchase 156 000 000-2 000 000 150 000 000-15 000 000-117 000 000 Payout ratio -0,20-0,03-0,02 0,02 0,17 88

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 0,26259962 0,06552 2 2,5% 1,59 0,17 0,269164611 0,06552 3 2,5% 1,63 0,17 0,275893726 0,06552 4 2,5% 1,67 0,17 0,282791069 0,06552 5 2,5% 1,72 0,17 0,289860846 0,06552 Terminal value 16,72 Reverse spit 1:5 83,60 In june 2010 Ericsson made a reverse stock split 1:5 89

Appendix 35 High Growth Net income Capital Expenditures Depreciation Change in WC Debt ratio FCFE FCFE 2001-21 264 000-22 331 000 9 781 000 9 834 000 0,71-14838771 FCFE 2002-19 013 000 3 957 000 7 149 000-23 825 000 0,63-9144200 FCFE 2003-10 844 000-13 296 000 6 531 000-3 894 000 0,66-2678249 FCFE 2004 19 024 000 15 576 000 4 740 000 15 178 000 0,57 7887893 FCFE 2005 24 460 000 27 171 000 6 073 000-14 985 000 0,49 21370934 Future Predictions Expected growth Cost of Equity 2006 2,5% 7,76% 2007 2,5% 7,76% 2008 2,5% 7,76% 2009 2,5% 7,76% 2010 2,5% 7,76% Future Growth in FCFE Discounted FCFE FCFE 2006 21905207 FCFE 2007 22452838 FCFE 2008 23014159 FCFE 2009 23589513 FCFE 2010 24179250 Ericsson Two-stage FCFE Terminal Value 471312489 437378682 Stock Price 27 Reverse split 1:5 135,56 Appendix 36 Date Company Target price 2005-11-14 Handelsbanken Capital Markets 30 kr 2005-12-30 Evli Bank 35 kr 2006-01-12 Deutsche Bank 25 kr 2006-01-17 Kauping Bank 36 kr 2006-02-01 SG Equity Research 24 kr 2006-02-01 Morgan Stanley 32 kr 90

Appendix 37 H&M Profit & loss account Consolidated 30/11/2001 30/11/2002 30/11/2003 30/11/2004 30/11/2005 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) 39 698 800 45 522 300 48 237 700 53 695 000 61 262 200 Sales 39 698 800 45 522 300 48 237 700 53 695 000 61 262 200 Costs of goods sold n.a. n.a. n.a. n.a. 25 080 700 Gross profit n.a. n.a. n.a. n.a. 36 181 500 Other operating expenses n.a. n.a. n.a. n.a. 23 008 600 Operating P/L [=EBIT] 5 477 800 8 259 100 9 223 000 10 667 300 13 172 900 Financial revenue 275 100 383 000 388 500 341 200 384 200 Financial expenses 18 900 13 200 2 800 3 200 4 300 Financial P/L 256 200 369 800 385 700 338 000 379 900 P/L before tax 5 734 000 8 628 900 9 608 700 11 005 300 13 552 800 Taxation 1 917 600 2 942 100 3 222 800 3 730 500 4 306 300 P/L after tax 3 816 400 5 686 800 6 385 900 7 274 800 9 246 500 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 0 0 0 0 0 P/L for period [=Net income] 3 816 400 5 686 800 6 385 900 7 274 800 9 246 500 Appendix 38 H&M Growth Rate 2 001 2 002 2 003 2 004 2 005 Operating revenue (Turnover) 39 698 800 45 522 300 48 237 700 53 695 000 61 262 200 % 15% 6% 11% 14% Sales 39 698 800 45 522 300 48 237 700 53 695 000 61 262 200 % 15% 6% 11% 14% Net Income 3 816 400 5 686 800 6 385 900 7 274 800 9 246 500 % 49% 12% 14% 27% 91

Appendix 39 H&M important data Year end 2000 2001 2002 2003 2004 2005 Total assets 15 700 400 20 410 300 25 198 700 25 761 700 28 127 300 33 183 200 Shareholders equity Cash Short-term debt 3 033 200 4 038 100 5 287 200 4 703 800 4 885 100 6 484 600 Long-term debt 777 400 940 600 823 800 961 200 1 033 200 774 800 Debt to total assets 0,24 0,24 0,24 0,22 0,21 0,22 Capital Expenditure 3 541 800 3 656 100 1 009 000 2 112 300 3 714 800 Depreciation 900100 1050600 1125600 1232200 1451600 Change in WC 3 080 700 4 935 300-4 045 000 1 914 400 2 090 500 wc 10645200 13725900 18661200 14 616 200 16 530 600 18 621 100 No. Of Shares 827 536 000 827 536 000 827 536 000 827 536 000 827 536 000 EPS (year end) 4,61 6,87 7,72 8,79 11,17 EPS (average) Shareholders Dividend 1 117 173 600 1 448 188 000 4 965 216 000 4 965 216 000 6 620 288 000 Suggested DPS DPS 1,35 1,75 6 6 8 New issue Deduction Fusioner Share repurchase Payout ratio 0,292729693 0,254657804 0,777527991 0,682522681 0,715977721 92

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 7,187395 0,06552 2 18,1% 15,58 0,54 8,488063 0,06552 3 18,1% 18,40 0,54 10,02411 0,06552 4 18,1% 21,73 0,54 11,83812 0,06552 5 18,1% 25,67 0,54 13,98041 0,06552 Terminal value 455,69 Spit 2:1 227,84 In june 2010 HM made a stock split 2:1 93

Appendix 41 High Growth Net income Capital Expenditures Depreciation Change in WC Debt ratio FCFE FCFE 2001 3816400 3 541 800 900100 3080700 0,24-510131 FCFE 2002 5686800 3 656 100 1050600 4935300 0,24-25262 FCFE 2003 6385900 1 009 000 1125600-4045000 0,22 9632364 FCFE 2004 7274800 2 112 300 1232200 1914400 0,21 5068294 FCFE 2005 9246500 3 714 800 1451600 2090500 0,22 5845247 Future Predictions Expected growth Cost of Equity 2006 18,1% 6,83% 2007 18,1% 6,83% 2008 18,1% 6,83% 2009 18,1% 6,83% 2010 18,1% 6,83% Future Growth in FCFE Discounted FCFE FCFE 2006 6903033 FCFE 2007 8152242 FCFE 2008 9627513 FCFE 2009 11369757 FCFE 2010 13427287 H&M Two-stage FCFE Terminal Value 317847807 297526592 Stock Price 360 Split 2:1 179,77 Appendix 42 Date Company Target price 2005-12-15 Handelsbanken Capital Markets 330 kr 2006-01-20 Evli Bank 350 kr 2006-01-26 credit Suisse 200 kr 2006-01-27 Öhman 290 kr 2006-01-27 Morgan Stanley 320 kr 2006-01-27 Lehman Brothers 280 kr 2006-01-27 Handelsbanken Capital Markets 340 kr 2006-01-27 Carnegie 350 kr 94

Appendix 43 Profit & loss account Appendix 44 HOLMEN Consolidated 31/12/2001 31/12/2002 31/12/2003 31/12/2004 31/12/2005 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) 17062000 16578000 16239000 16067000 17075000 Sales 16655000 16081000 15816000 15653000 16319000 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] 2449000 2713000 2338000 1835000 1973000 Financial revenue 44000 20000 n.a. 43000 11000 Financial expenses 199000 169000 212000 224000 244000 Financial P/L -155000-149000 -212000-181000 -233000 P/L before tax 2294000 2564000 2126000 1654000 1740000 Taxation 108000 605000 675000 443000 484000 P/L after tax 2186000 1959000 1451000 1211000 1256000 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 0 0 0 0 0 P/L for period [=Net income] 2186000 1959000 1451000 1211000 1256000 Holmen Growth Rate 2001 2002 2003 2004 2005 Operating revenue (Turnover) 17062000 16578000 16239000 16067000 17075000 % -2,8% -2,0% -1,1% 6,3% Sales 16655000 16081000 15816000 15653000 16319000 % -3,4% -1,6% -1,0% 4,3% P/L for period [=Net income] 2186000 1959000 1451000 1211000 1256000 % -10,4% -25,9% -16,5% 3,7% 95

Appendix 45 Holmen important data Year end 2000 2001 2002 2003 2004 2005 Total assets 24 394 000 24 948 000 26 967 000 26 358 000 26 567 000 32 183 000 Shareholders equity Cash Short-term debt 3 148 000 5 455 000 4 707 000 3 621 000 4 915 000 7 837 000 Long-term debt 4 232 000 5 421 000 7 075 000 7 371 000 7 803 000 8 267 000 Debt to total assets 0,30253 0,43595 0,43690 0,41703 0,47871 0,50039 Capital Expenditure -2 942 000 1 113 000 181 000-1 517 000 2 230 000 Depreciation 1 045 000 1 126 000 1 153 000 1 166 000 1 188 000 1 167 000 Change in WC -3 872 000 539 000 903 000-1 117 000-2 125 000 Working Capital 4 182 000 310 000 849 000 1 752 000 635 000-1 490 000 No. Of Shares 79 972 451 84 187 870 84 187 870 84 756 162 84 756 162 EPS (year end) 27,33441295 23,26938548 17,23526204 14,28804669 14,81898154 EPS (average) Shareholders Dividend 5 516 000 000 800 000 000 880 000 000 3 199 000 000 848 000 000 Suggested DPS DPS 68,97375197 9,502556603 10,45281226 37,74356843 10,00517225 New issue 474000000 Deduction Fusioner Share repurchase Payout ration 2,523330284 0,408371618 0,606478291 2,641618497 0,675159236 96

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 2005 848 000 000 DPS 2005 10 DPs 2010 11,32 Gordon Growth Model 2010 246 97

Appendix 47 Holmen Free Cash Flow To Equity Net income Capital Expenditures Depreciation Change in WC Debt ratio FCFE FCFE 2001 2186000-2942000 1126000-3872000 0,435946769 6664583 FCFE 2002 1959000 1113000 1153000 539000 0,436904365 1678015 FCFE 2003 1451000 181000 1166000 903000 0,417027089 1498804 FCFE 2004 1211000-1517000 1188000-1117000 0,478714194 3203354 FCFE 2005 1256000 2230000 1167000-2125000 0,500388404 1786588 Future Predictions Expected Stable Growth Cost of Equity 2006 2,5% 7,22% 2007 2,5% 7,22% 2008 2,5% 7,22% 2009 2,5% 7,22% 2010 2,5% 7,22% Future Growth in FCFE Discounted FCFE FCFE 2006 1831252 1707939 FCFE 2007 1877034 1632753 FCFE 2008 1923959 1560876 FCFE 2009 1972058 1492164 FCFE 2010 2021360 1426476 Terminal Value 43896055 40940174 Stock Price 483 Appendix 48 Date Company Target price 2005-11-01 Credit Suisse 236 kr 2006-01-18 Affärsvärlden 350 kr 2006-02-06 UBS 250 kr 2006-02-06 Handelsbanken Capital Markets 293 kr 98

Appendix 49 TeliaSonera Profit & loss account Consolidated 31/12/2001 31/12/2002 31/12/2003 31/12/2004 31/12/2005 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) 65 150 000 60 578 000 85 168 000 85 485 000 91 921 000 Sales 57 196 000 59 483 000 82 425 000 81 937 000 87 661 000 Costs of goods sold 40 435 000 38 182 000 46 688 000 43 104 000 47 287 000 Gross profit 24 715 000 22 396 000 38 480 000 42 381 000 40 374 000 Other operating expenses 19 255 000 33 819 000 24 152 000 23 588 000 27 085 000 Operating P/L [=EBIT] 5 460 000-11 423 000 14 328 000 18 793 000 17 549 000 Financial revenue n.a. 1 826 000 2 876 000 1 181 000 1 068 000 Financial expenses 695 000 1 834 000 3 305 000 2 526 000 1 598 000 Financial P/L -695 000-8 000-429 000-1 345 000-530 000 P/L before tax 4 765 000-11 616 000 13 899 000 17 448 000 17 019 000 Taxation 2 905 000-3 619 000 3 850 000 3 184 000 3 325 000 P/L after tax 1 860 000-7 997 000 10 049 000 14 264 000 13 694 000 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 -22 000-70 000-969 000-1 300 000 0 P/L for period [=Net income] 1 838 000-8 067 000 9 080 000 12 964 000 13 694 000 Appendix 50 TeliaSonera Growth rate 2001 2002 2003 2004 2005 Operating revenue (Turnover) 65 150 000 60 578 000 85 168 000 85 485 000 91 921 000-7,0% 40,6% 0,4% 7,5% Sales 57 196 000 59 483 000 82 425 000 81 937 000 87 661 000 4,0% 38,6% -0,6% 7,0% Net Income 1 838 000-8 067 000 9 080 000 12 964 000 13 694 000-539% 213% 43% 6% 99

Appendix 51 TeliaSonera important data Year end 2000 2001 2002 2003 2004 2005 Total assets 122715000 94875000 172812000 153042000 153145000 163094000 Shareholders equity 60 179 000 113 949 000 115 834 000 129 113 000 135 694 000 Cash Short-term debt 33151000 26739000 39827000 30573000 35111000 30270000 Long-term debt 33256000 41220000 52880000 43653000 28794000 37811000 Debt to total assets 0,54 0,72 0,54 0,49 0,42 0,42 Capital Expenditure -29392000 53189000-1289000 10424000 5773000 Depreciation 8222000 10536000 20844000 17707000 15596000 13188000 Change in WC 8300000-12507000 12428000-1683000 5649000 WC -1776000 6524000-5983000 6445000 4762000 10411000 No. Of Shares 3 001 200 000 4 605 756 725 4 675 232 069 4 675 232 069 4 490 457 213 EPS (year end) 0,612-1,752 1,942 2,311 3,050 EPS (average) Shareholders Dividend 1500600000 600000000 1842302690 4675000000 5 610 000 000 Suggested DPS DPS 0,5 0,1 0,4 1,0 1,2 New issue 0 1 604 556 725 69 475 344 Deduction 0 Fusioner 0 Share repurchase 10 162 617 080 Payout ratio 0,82-0,07 0,20 0,43 0,41 100

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 2005 5 610 000 000 DPS 2005 1,2 DPS 2011 2 Stock price 49,1 Appendix 53 TeliaSonera FCFE Net income Capital Expenditures Depreciation Change in WC Debt ratio FCFE FCFE 2001 1 838 000-29392000 10536000 8300000 0,72 10810851 FCFE 2002-8 067 000 53189000 20844000-12507000 0,54-17262675 FCFE 2003 9 080 000-1289000 17707000 12428000 0,49 12462493 FCFE 2004 12 964 000 10424000 15596000-1683000 0,42 16958516 FCFE 2005 13 694 000 5773000 13188000 5649000 0,42 14722811 Future Predictions Expected Stable Growth Cost of Equity 2006 2,5% 7,22% 2007 2,5% 7,22% 2008 2,5% 7,22% 2009 2,5% 7,22% 2010 2,5% 7,22% Future Growth in FCFE Discounted FCFE FCFE 2006 15090882 14074689 FCFE 2007 15468154 13455098 FCFE 2008 15854858 12862783 FCFE 2009 16251229 12296542 FCFE 2010 16657510 11755228 Terminal Value 361736174 337377517 Stock Price 75,1 101

Appendix 54 Date Company Target Price 2005-11-28 Handelsbanken Capital markets 45 kr 2005-12-01 Morgan Stanley 44,20 kr 2005-12-21 Deutshe Bank 45,50 kr 2006-02-08 Dresdner Kleinwort 46 kr Appendix 55 Volvo Profit & loss account Consolidated 31/12/2001 31/12/2002 31/12/2003 31/12/2004 31/12/2005 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) 190740000 186198000 183291000 211258000 240596000 Sales 189280000 186198000 183291000 210401000 240559000 Costs of goods sold 155592000 151569000 146879000 163947000 186662000 Gross profit 35148000 34629000 36412000 47311000 53897000 Other operating expenses 35824000 32283000 30529000 33111000 35783000 Operating P/L [=EBIT] -676000 2346000 5883000 14200000 18151000 Financial revenue 1275000 1708000 1296000 820000 835000 Financial expenses 2465000 2041000 5522000 2441000 972000 Financial P/L -1190000-333000 -4226000-1621000 -137000 P/L before tax -1866000 2013000 1657000 12579000 18014000 Taxation -326000 590000 1334000 3184000 4908000 P/L after tax -1540000 1423000 323000 9395000 13106000 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 73000-30000 -25000-40000 0 P/L for period [=Net income] -1467000 1393000 298000 9355000 13052000 102

Appendix 56 Volvo Growth rate 2001 2002 2003 2004 2005 Operating revenue (Turnover) 190740000 186198000 183291000 211258000 240596000 % -2,4% -1,6% 15,3% 13,9% Sales 189280000 186198000 183291000 210401000 240559000 % -1,6% -1,6% 14,8% 14,3% P/L for period [=Net income] -1467000 1393000 298000 9355000 13052000 % 95,0% -78,6% 3039,3% 39,5% Appendix 57 Volvo important data Year end 2000 2001 2002 2003 2004 2005 Total assets 200743000 260925000 239222000 231252000 222896000 257135000 Shareholders equity Cash Short-term debt 53570000 88145000 74617000 76979000 79141000 108290000 Long-term debt 58242000 87204000 86080000 81637000 74117000 70077000 Debt to total assets 0,55699078 0,672028361 0,671748418 0,685901095 0,687576269 0,69367064 Capital Expenditure -3355000-7051000 -5889000-2998000 9130000 Depreciation 6251000 9961000 10844000 9961000 10305000 9894000 Change in WC -16556000 1461000 21907000-8460000 -9304000 Working Capital 43147000 26591000 28052000 49959000 41499000 32195000 No. Of Shares 422400000 419400000 419400000 418500000 418500000 EPS (year end) -3,473011364 3,32141154 0,710538865 22,35364397 31,18757467 EPS (average) Shareholders Dividend 3400000000 3400000000 3400000000 3400000000 5100000000 Suggested DPS DPS 8,049242424 8,106819266 8,106819266 8,124253286 12,18637993 New issue Deduction Fusioner Share repurchase Payout ratio -2,317655078 2,440775305 11,40939597 0,36344201 0,390744713 103

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 2005 5100000000 DPS 2005 12,2 DPs 2010 22,6 EPS 2010 28,2287025 Stock price 315,1 Split 5:1 63 Appendix 59 Volvo FCFE Net income Capital Expenditures Depreciation Change in WC Debt ratio FCFE FCFE 2001-1467000 -3355000 9961000-16556000 0,67202836 8330168,81 FCFE 2002 1393000-7051000 10844000 1461000 0,67174842 6787486,5 FCFE 2003 298000-5889000 9961000 21907000 0,68590109-1604497,1 FCFE 2004 9355000-2998000 10305000-8460000 0,68757627 16154277,7 FCFE 2005 13052000 9130000 9894000-9304000 0,69367064 16136124 Future Predictions Expected Stable Growth Cost of Equity 2006 2,5% 11,7% 2007 2,5% 11,7% 2008 2,5% 11,7% 2009 2,5% 11,7% 2010 2,5% 11,7% Future Growth in FCFE FCFE 2006 16539527 14809317,51 FCFE 2007 16953015 FCFE 2008 17376841 FCFE 2009 17811262 FCFE 2010 18256543 Terminal Value 203772704 182455922 Stock Price 436 Split 5:1 87,2 104

Appendix 60 Date Company Target price 2005-11-24 Evli Bank 385 kr 2006-01-05 Deutsche Bank 400 kr 2006-02-07 Credit Suisse 300 kr 2006-02-07 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 136,6549 72,1% -27,9% Assa Abloy FCFE Valuation 139,9534 73,9% -26,1% Atlas Copco Actual Stock price 169,7 Atlas Copco DDM Valuation 118,2329 69,7% -30,3% Atlas Copco FCFE Valuation 167,6445 98,8% -1,2% Axfood Actual Stock price 251,5 Axfood DDM Valuation 282,4426 112,3% 12,3% Axfood FCFE Valuation 335,7595 133,5% 33,5% Boliden Actual Stock price 136,7 Boliden DDM Valuation 173,1581 126,7% 26,7% Boliden FCFE Valuation 215,0633 157,3% 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 227,8443 101,7% 1,7% H&M FCFE Valuation 179,7666 80,3% -19,7% Holmen Actual Stock price 221,4 Holmen DDM Valuation 245,8248 111,0% 11,0% Holmen FCFE Valuation 483,0348 218,2% 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

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