15.535 Business Analysis Using Financial Statements Spring 2003
Assignment #1
VALUATION EXAMPLE: DELL COMPUTER
In the first three classes, we have been exposed to a number of real-world techniques used in
company valuation. This course is about the application of these techniques to valuing actual (vs
ficticous) companies in today's markets. Therefore, I would like you to dive right in and perform a
"quick and dirty" analysis of Dell Computer!
Please develop a prediction of the "fair value" of Dell Computer for each of the following valuation
techniques:
APPROACH 1:DCF using analysts' forecasts of EPS as proxies for future cash flows
(Please follow the equity valuation example for Compaq Computer example that we covered in
Class #2.)
Necessary Data
a) Forecasted EPS in year 1 (Jan 2002).
b) Forecasted EPS in year 2 (Jan 2003).
c) Forecasted 5 year growth rate in EPS.
d) Assume that equity "free cash flow" per share equals forecasted EPS
---> working capital acccruals equals zero
---> annual depreciation charge is a good approximation of annual investment cash flows
e) DELL equity Beta.
f) Rf (risk free rate) (Use 30 year Treasury Constant Maturity):
Link http://www.stls.frb.org/fred/data/irates.html
g) Rm= Expected Market return = 15%
APPROACH 2: Relative PE analysis (comparing multiples)
Necessary Data:
a) Current EPS (ttm= trailing 12 months) for Dell Computer.
b) P/E ratio (ttm) for Computer Industry.
APPROACH 3: Relative PEG analysis (comparing multiples)
Necessary Data:
a) Current EPS (ttm= trailing 12 months) for Dell Computer.
b) 5 year projected earnings growth for Dell.
c) PEG ratio for Computer Industry.
