Equity Valuation Case Study

Stock Price Valuation
A Case study in Dividend Discount models & Free Cash Flow to Equity models
Masters thesis within Finance

Authors:
Anders Karlsson
Niklas Josefsson
Tutor:
Urban sterlund
Jnkping
2011-09-30
Masters Thesis within Finance

Title:
Stock Price Valuation
Authors:
Anders Karlsson and Niklas Josefsson
Tutor:
Urban sterlund
Date:
2011-09-30
Subject terms:
Valuation of stock price, Valuation Models, Case Study
Abstract
Purpose
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.
Method
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
1.2
1.3
1.4
Background ................................................................................... 1
Problem Discussion....................................................................... 3
Purpose ......................................................................................... 4
Delimitation ................................................................................... 4
2 Theoretical Framework ........................................................ 6

2.1
2.2
2.3
2.4
2.5
2.6
2.7
The Efficient Market Hypothesis .................................................... 6

2.1.1 Different types of Efficiency ................................................ 8
Discounted Cash Flow (DCF) ........................................................ 9
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
Equity Valuation .......................................................................... 16
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
Future Growth ............................................................................. 19
Previous Research ...................................................................... 21
3 Methodology ....................................................................... 24
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
Methodological Approach ............................................................ 24

Outline of the Study ..................................................................... 24
The research process of the thesis ............................................. 25
Inductive vs. Deductive ............................................................... 26
Qualitative vs. Quantitative .......................................................... 27
Data Search ................................................................................ 28
Criticism of the Sources .............................................................. 29
The Approach and Structure of the Thesis .................................. 29
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
4.2
Alfa Laval .................................................................................... 34

4.1.1 Assumptions ..................................................................... 34
4.1.2 Two-stage DDM ................................................................ 35
4.1.3 Two-stage FCFE............................................................... 36
Assa Abloy .................................................................................. 37
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
4.9.3 FCFE ................................................................................ 54
4.10 Volvo ........................................................................................... 54
4.10.1 Assumptions ..................................................................... 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
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 companys 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 markets 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-
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 corporations 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).
400
350
Alfa Laval
300
Assa Abloy
Atlas Copco
250
Axfood
200
Boliden
150
Ericsson
100
H&M
Holmen
50
TeliaSonera
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
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)
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 periods performance measure to price relative to the same measure
for comparable firms (Flstrand, 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 firms stock price. Our choice of models is
Dividend Discount Model and Free Cash Flow to Equity since these models are most ap-
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.
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.
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).
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
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 firms 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.
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 DDMs, since small variations in growth will make a large impact
on the value.
Where,
= Next years 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
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)
= 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 its 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,
= Expeted Cash flow to Equity in period t
= Cost of Equity
2.5
2.5.1
Free Cash Flow to Equity Discount Models
Cash to stockholders to FCFE ratio
The Cash to stockholders to FCFE ratio shows how much of the cash available to be paid
out to stockholders in the firm that is actually paid out to them, in form of dividends and
stock repurchases. (Damodaran, A. 2002)
A value of 1 would imply that the firm is returning all the available cash after meeting its
expenses to the owners. Therefore a value below 1 means that the firm is not paying out all
that they can afford, and keep some of it in the firm, reasons for this could be amongst
others to reinvest it in positive net present value project, increase cash balance and future
16
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 dont 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 Cottles (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
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
PART 3
Empirical Findings and
Analysis
Problem Discussion
PART 2
Extended Analysis
Theoretical Framework
Previous Research
PART 4
Conclusion
Reflections and Discussion

Figure 5, The research process of the thesis
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 & Skldberg, (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 its 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 authors 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 Jnkping
Universitys 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 companys 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 fi-
nancial 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
Sources
Academic Study
Textbooks
Journals
Academic Papers
Articles
Case Study
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
Thurn (1998). More importantly it will discuss how the approach and process of conducting this thesis can have affected the validity and reliability of the studys 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 &
Grnhaug, 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
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 Lavals 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 20012005. 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.
Alfa Laval
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
140 SEK
120 SEK
100 SEK
80 SEK
60 SEK
40 SEK
20 SEK
0 SEK
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
Abloys 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.
Assa Abloy
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
180 SEK
160 SEK
140 SEK
120 SEK
100 SEK
80 SEK
60 SEK
40 SEK
20 SEK
0 SEK
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 Copcos 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
100%
160 SEK
90%
140 SEK
80%
120 SEK
70%
100 SEK
60%
80 SEK
50%
40%
60 SEK
30%
40 SEK
20%
20 SEK
10%
0 SEK
0%
Actual
DDM
FCFE
Stock price Valuation Valuation
Morgan
Stanley
Figure 8, Atlas Copco stock price valuation
40
Lehman
Brothers
Lehman
Brothers
Bear
Stearns
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 Hemkp and D&D Dagligvaror, and the acquisition of
Spar Inn Snabbgross, Spar Sverige and Spar Finland. At the point of its establishment
Hemkp 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 ABs 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 Axfoods 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 rsredovisning 2005. Axfoods 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 201012-30 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
130%
120%
110%
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
300 SEK
250 SEK
200 SEK
150 SEK
100 SEK
50 SEK
0 SEK
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 ABs 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 Bolidens goal to become Europes 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 200601-31 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 ABs 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 Ericcsons 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 its 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
Ericsson
180 SEK
160 SEK
140 SEK
120 SEK
100 SEK
80 SEK
60 SEK
40 SEK
20 SEK
0 SEK
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 Vsters, 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&Ms 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 companys extensive forest holdings and its high proportion of energy production are strategically important resources for its future growth. Holmens 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 ABs 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 Holmens
main market is Europe and its accounts for 90 percent of the groups 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 didnt 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 Affrsvrldens 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
140%
70 SEK
60 SEK
50 SEK
40 SEK
30 SEK
20 SEK
10 SEK
0 SEK
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 ABs 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 20062010. Its 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 shareholders 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
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
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
DDM
FCFE
Stock price Valuation Valuation
Evli Bank
Deutsche
Bank
Credit
Suisse
Kaupthing
Bank
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
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
Median DDM valuation
Lowest DDM valuation
Highest DDM valuation
Spread
-11%
-3%
-52%
27%
0,784203
Average FCFE valuation

Median FCFE valuation
Lowest FCFE valuation
Highest FCFE valuation
Spread
21%
16%
-20%
118%
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 doesnt 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
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
Alfa laval
600
Assa Abloy
500
Atlas Copco
400
Axfood
300
Boliden
200
Ericsson
100
H&M
Holmen
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
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
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
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
worlds 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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Annual Reports
Alfa Laval Annual Report 2001
65

Assa Abloy Annual Report 2001
Atlas Copco Annual Report 2001
Axfood Annual Report 2001
Boliden Annual Report 2001
Ericsson Annual Report 2001
H&M Annual Report 2001
Holmen Annual Report 2001
66
TeliaSonera Annual Report 2001

Volvo Annual Report 2001
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
Operating revenue (Turnover) 16 218 700
Sales
15 829 600
Net Income
n.a.
2002
2003
2004
2005
14 864 000 14 151 700 15 311 000 16 602 500
-8,4%
-4,8%
8,2%
8,4%
14 595 000 13 909 300 14 985 800 16 330 400
-7,8%
-4,7%
7,7%
9,0%
120 000
645 800
603 200
928 000
538%
93%
154%
68
Appendix 3
Alfa Laval important data

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

EPS (average)
Shareholders Dividend
Suggested DPS
DPS
New issue
Deduction
Fusioner
Share repurchase
0
3 136 600 000
Payout ratio
0,35
69
0,74
0,57
Appendix 4
Alfa Laval Two-stage DDM

Riskfree rate
Market Risk premium
Beta stable Growth
Beta High Growth
Cost of equity stable growth
Cost of equity high growth
Expected growth rate stable growth
Expected growth rate high growth
RoE stable growth
Payout ratio Stable growth
High Growth Stage

1
2
3
4
5
6
7
8
9
10
Terminal value
Value
Spit 4:1
3,37%
5,50%
1,0623
1,0623
9,21%
9,21%
2,50%
12,0%
0,9
Expected Growth EPS

Payoutratio
DPS
Cost of Equity
Present Value
12,0%
9,31
0,57 5,319579
9,21%
12,0%
10,42
0,57 5,957929
9,21%
12,0%
11,68
0,57 6,67288
9,21%
12,0%
13,08
0,57 7,473626
9,21%
12,0%
14,65
0,57 8,370461
9,21%
12,0%
16,40
0,57 9,374916
9,21%
8,584093495
12,0%
18,37
0,57 10,49991
9,21%
8,803178675
12,0%
20,58
0,57 11,75989
9,21%
9,027855395
12,0%
23,04
0,57 13,17108
9,21%
9,258266367
12,0%
25,81
0,57 14,75161
9,21%
9,494557939
228,29
273,46
68,37
Alfa laval made a stock split 4:1
70
Appendix 5
Alfa Laval Two-stage FCFE
High Growth
FCFE 2001
FCFE 2002
FCFE 2003
FCFE 2004
FCFE 2005
Net income
n.a.
120000
645800
603200
928 000
Capital Expenditures Depreciation Change in WC

258 100
912200
-196600
3 043 900
811000
-773400
380 200
787200
312800
85 000
745800
-238300
725 200
579500
-428000
Future Predictions
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Expected growth
Cost of Equity
12,0%
12,0%
12,0%
12,0%
12,0%
12,0%
12,0%
12,0%
12,0%
12,0%
Future Growth in FCFE

FCFE 2006
FCFE 2007
FCFE 2008
FCFE 2009
FCFE 2010
FCFE 2011
FCFE 2012
FCFE 2013
FCFE 2014
FCFE 2015
Terminal Value
Stock Price
Split 4:1
9,21%
9,21%
9,21%
9,21%
9,21%
9,21%
9,21%
9,21%
9,21%
9,21%
Discounted FCFE
1152737
1291065
1445993
1619512
1813853
2031516
2275297
2548333
2854133
3196629
1860147
1907622
1956309
2006238
2057442
48811496
31416470
369
92,24
Appendix 6
Date
2005-12-14
2006-01-13
2006-01-16
2006-02-10
2006-03-06
Company
Credit Suisse
Lehman Brothers
Handelsbanken Capital markets
Danske Markets Equities
Handelsbanken Capital markets
71
Target Price
165 kr
180 kr
190 kr
206 kr
230 kr
Debt ratio
0,91
0,70
0,66
0,63
0,64
FCFE
-317178
677871
932169
1029229
Appendix 7
Assa Abloy
Consolidated
30/11/2001 30/11/2002 30/11/2003 30/11/2004 30/11/2005

th SEK
Operating revenue (Turnover)

Sales
Costs of goods sold
Gross profit
Financial revenue
Financial expenses
Financial P/L
P/L before tax
Taxation
P/L after tax
Extr. and other P/L
P/L for period [=Net income]
th SEK
th SEK
12 months
th SEK
12 months 12 months
12 months
12 months
Local GAAP
Local GAAP Local GAAP
Local GAAP
Local GAAP
22656700
22510000
13863100
8793600
6660800
2132800
2793900
3451100
-657200
1475600
507400
968200
n.a.
n.a.
th SEK
25515800
25396900
15525900
9989900
7352000
2637900
237700
860600
-622900
2015000
689100
1325900
n.a.
n.a.
-19600
948600
24260000
24080000
14613000
9647000
8574000
1073000
231000
721000
-490000
583000
556000
27000
n.a.
n.a.
-56000
1269900
25707000
25526000
15148000
10559000
7789000
2770000
194000
670000
-476000
2294000
792000
1502000
n.a.
n.a.
-18000
9000
-7000
1495000
27838000
27802000
16508000
11294000
7252000
4078000
51000
573000
-522000
3556000
943000
2613000
0
0
0
2613000
Appendix 8
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
Total assets
Shareholders equity
Cash
Short-term debt
Long-term debt
2000
2001
2002
2003
2004
2005
26097200
34669000
33260600
29827000
29322000
33692000
5594600
9215500
8763100
13578600
9785900
10762600
8198000
10935000
10185000
8662000
13522000
5757000
0,57
0,64
0,62
0,64
0,64
0,57
1 040 200
384 800
-2 018 100
-219 000
3 938 000
1721100
1907100
1856000
1872000
882000
Capital Expenditure
Depreciation
Change in WC
wc
2901300
-1061500
1839800
-1593900
245900
404100
650000
-1789000
-1139000
-2028000
-3 167 000
No. Of Shares
356 730 000
361 730 000
370 935 000
370 935 000
378 718 000
378 718 000
2,62
3,42
0,02
3,95
6,90
325 557 000
370 935 000
463 668 750
473 397 500
984 666 800
0,9
1,25
1,25
2,6
0,34
0,29
51,52
0,32
0,38
EPS (year end)

EPS (average)
Suggested DPS
DPS
New issue
Deduction
Fusioner
Share repurchase
Payout ratio
73
Appendix 10
Assa Abloy two-stage DDM

Riskfree rate
Market Risk premium
Beta stable Growth
Beta High Growth
RoE stable growth
3,37%
5,50%
0,8927
0,8927
8,28%
8,28%
2,50%
8,3%
0,75
High Growth Stage

1
2
3
4
5
Terminal value
Stock price
Expected Growth EPS

Payoutratio
DPS
Cost of Equity
8,3%
7,47
0,33 2,482013
0,06552
8,3%
8,09
0,33 2,687762
0,06552
8,3%
8,76
0,33 2,910565
0,06552
8,3%
9,49
0,33 3,151839
0,06552
8,3%
10,27
0,33 3,413113
0,06552
136,65
136,65
Appendix 11
Assa Abloy two-stage FCFE
High Growth
FCFE 2001
FCFE 2002
FCFE 2003
FCFE 2004
FCFE 2005
Net income
948600
1269900
9000
1495000
2613000

1 040 200
1721100
-1061500
384 800
1907100
-1593900
-2 018 100
1856000
404100
-219 000
1872000
-1789000
3 938 000
882000
-2028000
Future Predictions
2006
2007
2008
2009
2010
FCFE 2006
FCFE 2007
FCFE 2008
FCFE 2009
FCFE 2010
Terminal Value
Stock Price
Expected growth
Cost of Equity
8,3%
8,3%
8,3%
8,3%
8,3%
8,28%
8,28%
8,28%
8,28%
8,28%
Discounted FCFE
2353387
2548472
2759730
2988500
3236233
57391443
53002884
140
74
Debt ratio
0,64
0,62
0,64
0,64
0,57
FCFE
1568147
2460902
1253114
2881092
2173235
Appendix 12
Date
2005-11-02
2005-11-18
2006-02-10
2006-02-13
2006-02-13
2006-02-15
Company
Target price
SEB Enskilda
144 kr
Credit Suisse
110 kr
Morgan Stanley
112 kr
Lehman Brothers
125 kr
Danske Bank
140-150 kr
Handelsbanken Capital Markets
134 kr
Appendix 13
Atlas Copco
Consolidated
30/11/2001 30/11/2002 30/11/2003 30/11/2004 30/11/2005

th SEK

Sales
Costs of goods sold
Gross profit
Financial revenue
Financial expenses
Financial P/L
P/L before tax
Taxation
P/L after tax
Extr. and other P/L
th SEK
th SEK
12 months
th SEK
12 months 12 months
th SEK
12 months
12 months
Local GAAP
Local GAAP
Local GAAP
51340000
51139000
35134000
16206000
10076000
6130000
164000
1594000
-1430000
4700000
1622000
3078000
47773000
44842000
47562000
44619000
32803000
30640000
14970000
14202000
16659000
8892000
-1689000
5310000
311000 n.a.
1091000
397000
-780000
-397000
-2469000
4913000
1361000
1619000
-3830000
3294000
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
-11000
-59000
-20000
3067000
-3889000
3274000
48817000
48654000
32837000
15817000
9280000
6700000
495000
601000
-106000
6380000
2112000
4268000
0
0
0
4254000
52975000
52742000
33971000
18771000
9601000
9403000
577000
680000
-103000
9300000
2936000
6364000
0
0
0
6581000
Appendix 14
Atlas Copco Growth Rate

2 001
2 002
2 003
2 004
Operating revenue (Turnover) 51 340 000 47 773 000 44 842 000 48 817 000
%
-7%
-6%
8,9%
Sales
51 139 000 47 562 000 44 619 000 48 654 000
%
-7%
-6%
9,0%
Net Income
3 067 000 -3 889 000 3 274 000 4 254 000
%
-227%
-184%
30%
75
2 005
52 975 000
8,5%
52 742 000
8%
6 581 000
55%
Appendix 15
Atlas Copco
Year end
Total assets
Shareholders equity
Cash
Short-term debt
Long-term debt
2000
2001
2002
2003
2004
2005
61688000
64357000
48668000
45862000
47222000
54955000
19359000
18128000
18032000
18536000
10811000
17503000
11679000
13115000
11295000
13595000
15699000
13448000
0,61
0,57
0,58
0,54
0,53
0,53
3 588 000
-7 435 000
714 000
1 264 000
3 476 000
4556000
683276
85000
688000
3320000
1623000
903000
5978000
6881000
1158000
8039000
1538000
9577000
-705000
8872000
209 602 184
209 602 184
209 602 184
209 602 184
628 806 553
14,63
-18,55
15,62
20,30
10,47
Capital Expenditure
Depreciation
Change in WC
wc
No. Of Shares
EPS (year end)

EPS (average)
Suggested DPS
DPS
-720000
1 125 000 000 1 165 000 000 1 219 000 000 1 575 000 000 1 890 000 000
5,37
5,56
5,82
7,51
New issue
Deduction
Fusioner
Shrae repurchase
Payout ratio
3,01
4192000000
0,37
76
-0,30
0,37
0,37
0,29
Appendix 16
Atlas Copco Two-stage DDM

Riskfree rate
Market Risk premium
Beta stable Growth
Beta High Growth
RoE stable growth
High Growth Stage

1
2
3
4
5
6
7
8
9
10
Terminal value
Stock price
Spit 2:1
3,37%
5,50%
1,0532
1,266
9,16%
10,33%
2,50%
9,0%
0,9
Expected Growth EPS

Payoutratio
DPS
Cost of Equity
9,0%
11,41
0,34 3,915751
10,33%
9,0%
12,43
0,34 4,268169
10,33%
9,0%
13,55
0,34 4,652304
10,33%
9,0%
14,77
0,34 5,071011
10,33%
9,0%
16,10
0,34 5,527402
10,33%
9,0%
17,55
0,34 6,024868
10,33%
9,0%
19,13
0,34 6,567107
10,33%
9,0%
20,85
0,34 7,158146
10,33%
9,0%
22,73
0,34 7,802379
10,33%
9,0%
24,78
0,34 8,504594
10,33%
209,81
236,47
118,23
77
In 2007 Atlas Copco made a stock split 2:1
Appendix 17
Atlas Copco Two-stage FCFE
High Growth
FCFE 2001
FCFE 2002
FCFE 2003
FCFE 2004
FCFE 2005
Net income
3067000
3 588 000
4556000
1623000
-3889000
-7 435 000
683276
5978000
3274000
714 000
85000
1158000
4254000
1 264 000
688000
1538000
6581000
3 476 000
3320000
-705000
Future Predictions
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
FCFE 2006
FCFE 2007
FCFE 2008
FCFE 2009
FCFE 2010
FCFE 2011
FCFE 2012
FCFE 2013
FCFE 2014
FCFE 2015
Terminal Value
Expected growth
Cost of Equity
9,0%
9,0%
9,0%
9,0%
9,0%
9,0%
9,0%
9,0%
9,0%
9,0%
10,33%
10,33%
10,33%
10,33%
10,33%
10,33%
10,33%
10,33%
10,33%
10,33%
Discounted FCFE
7454316
8125204
8856472
9653555
10522375
11469389
12501634
13626781
14853191
16189978
10395248
11330820
12350594
13462147
14673740
249072848
148619360
Stock Price
Split 2:1
335
167,64
Appendix 18
Date
Company
Target price
2005-12-05 Morgan Stanley
155 kr
2006-01-13 Lehman Brothers
200 kr
215 kr
2006-02-03 Bear Stearns
230 kr
78
Debt ratio
0,57
0,58
0,54
0,53
0,53
FCFE
2784175
-2993891
2453091
3254257
6838822
Appendix 19
Axfood
Amounts in SEK m
Net sales
Cost of goods sold
Gross profit
Selling expenses
Administrative expenses
Share of profit in associated companies
Other operating income
Operating profit
Interest income and similar profit/loss items
Interest expense and similar profit/loss items
Net financial items
Profit before tax
Current tax
Deferred tax
Net profit for the year
2001
32428
-28425
4003
-2331
-1140
21
179
2002
33115
-28612
4503
-2472
-1215
32
175
653
15
-141
-126
527
-144
-38
328
1023
20
-124
-104
919
-242
-44
625
2003
33616
-29721
3895
-2015
-1144
10
302
-14
1034
16
-79
-63
971
-215
-60
684
Appendix 20
Axfood Growth rate

Net Sales
EBIT
EBT
Net income
2001
2002
2003
2004
2005
32428
7,27%
653
483,04%
527
#DIVISION/0!
328
-1064,71%
33115
2,12%
1023
56,66%
919
74,38%
625
90,55%
33616
1,51%
1034
1,08%
971
5,66%
684
9,44%
33826
0,62%
1008
-2,51%
980
0,93%
664
-2,92%
28086
-16,97%
1040
3,17%
1026
4,69%
729
9,79%
79
2004
33826
-29748
4078
-2056
-1187
3
195
-25
1008
18
-46
-28
980
-254
-58
664
2005
28 086
-24172
3914
-1879
-1158
4
193
-21
1040
11
-25
-14
1026
-576
279
729
Appendix 21
Axfood important data

Year end
Total assets
Shareholders equity
Cash
Short-term debt
Long-term debt
2000
2001
2002
2003
2004
2005
7585
4184
1821
7767
1208
406
4616
1197
7355
1693
353
3955
887
6977
2127
346
3 641
186
7220
2763
977
3 427
344
7569
2944
639
3 323
540
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
EPS (year end)

EPS (average)
Suggested DPS
DPS
6,16
6,16
11,74
11,74
12,79
12,82
12,39
12,40
13,37
13,49
10
2.50
0,188
133
5
2,499
266
5.50
4,972
295
5.50
5,506
590
15
10,819
10
0
0
0
0
0
0
0
20
0
12
0
6
0
0
0
70
0
0
0
3,05%
21,28%
38,79%
44,39%
80,23%
New issue
Deduction
Fusioner
Share repurchase
Payout ration
53229028 53 497 028 53 577 828 54 531 378
80
Appendix 22
Axfood Three-stage DDM
Riskfree rate assumed by Axfood
Riskfree rate (kvartal 4 2005)
AA rating premium
Risk of
Market Risk premium high growth
Market Risk premium stable growth
Beta
Expected growth rate Stable growth
RoE stable growth
0,04
0,03312
0,01
0,054
0,054
0,6
0,06552
0,06552
0,1
0,025
0,12
0,791666667
Three stage dividend discount model

High Growth Stage
Expected GrowthEPS
Payoutratio
DPS
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
10
Terminal Price
475,4296307
Stock Price
81
252,040415
282,4
Appendix 23
Axfood Three-stage FCFE
Net income
Capital Expenditures
FCFE 2001
FCFE 2002
FCFE 2003
FCFE 2004
FCFE 2005
328
625
684
664
729
Future predictions
High Growth Stage
Expected Growth
EPS
1
2
3
4
5
10,00%
10,00%
10,00%
10,00%
10,00%
6
7
8
9
10
8,50%
7,00%
5,50%
4,00%
2,50%
11
Terminal Price
448,87

FCFE 2006
FCFE 2007
FCFE 2008
FCFE 2009
FCFE 2010
FCFE 2011
FCFE 2012
FCFE 2013
FCFE 2014
FCFE 2015
Terminal value
518
496
552
599
467
Payoutratio
12,42
13,66
15,03
16,53
18,18
19,73
21,11
22,27
23,16
23,74
Transition Stage
Stable Growth
Depreciation
374
559
637
299
257
DPS
0,46
0,46
0,46
0,46
0,46
8,54
9,14
9,78
10,46
11,19
0,58
0,63
0,69
0,74
0,79
11,88
12,50
13,03
13,48
13,81
Discounted FCFE
507,14
557,86
613,64
675,01
742,51
742,51
805,62
862,02
909,43
945,80
969,45
696,85
709,59
712,57
705,54
688,64
14796,23
Sum of PV FCFE
Value of stock
18309,43
335,76
Appendix 24
Date
Company
Target Price
2005-12-02 HQ Bank
240 kr
2006-02-06 hman
215 kr
2006-02-06 Handelsbanken Capital Markets
180 kr
82
Change in WC Debt ratio

-138
540
492
449
737
0,75
0,66
0,55
0,52
0,51
FCFE
398,9447663
418,971584
423,4940519
592,8225762
470,9656494

6,55%
7,96
6,55%
7,95
6,55%
7,93
6,55%
7,91
6,55%
7,89
6,55%
6,55%
6,55%
6,55%
6,55%
7,81
7,66
7,45
7,18
6,87
Appendix 25
Boliden
Consolidated

Sales
Costs of goods sold
Gross profit
Financial revenue
Financial expenses
Financial P/L
P/L before tax
Taxation
P/L after tax
Extr. and other P/L
31/12/2001
th SEK
12 months
Local GAAP
10302000
10250000
9686000
616000
1565000
-949000
50000
2857000
-2807000
-3756000
-562000
-3194000
n.a.
n.a.
957000
-2237000
31/12/2002
31/12/2003
th SEK
th SEK
12 months
12 months
Local GAAP
Local GAAP
9675000
9651000
9556000
9545000
8569000
8507000
1106000
1144000
692000
1163000
414000
-19000
48000
69000
351000
301000
-303000
-232000
111000
-251000
-20000
-265000
131000
14000
n.a.
n.a.
n.a.
n.a.
1000
-1000
132000
13000
31/12/2004
th SEK
12 months
Local GAAP
18341000
17928000
15563000
2778000
1112000
1666000
35000
501000
-466000
1200000
145000
1055000
n.a.
n.a.
0
1055000
Appendix 26
Boliden
%
2001
2002
10302000 9675000
-6,09%
2003
2004
2005
9651000 18341000 20563000
-0,248% 90,04% 12,11%
Sales
%
%
10250000 9556000
-6,77%
-2237000 132000
106%
9545000 17928000 20441000

-0,12% 87,83% 14,02%
13000 1055000 2046000
-90,15% 8015,38% 93,93%
83
31/12/2005
th SEK
12 months
Local GAAP
20563000
20441000
16486000
3955000
1008000
3069000
26000
283000
-257000
2812000
766000
2046000
0
0
0
2046000
Appendix 27
Boliden
Year end
Total assets
Shareholders equity
Cash
Short-term debt
Long-term debt
2000
2001
2002
2003
2004
2005
12 057 000 11 176 000 10 694 000
19 861 000
20 017 000
22 918 000
3 539 000
7 453 000
2 038 000
3 906 000
2 905 000
5 848 000
8 432 000
1 195 000
6 065 000
9 855 000
8 153 000
6 781 000
0,99287
0,77380
0,75771
0,69287
0,55243
0,55105
2 442 000
63 000
3 509 000
2 859 000
1 330 000
837 000
519 000
652 000
1 311 000
1 229 000
Capital Expenditure
Depreciation
986 000
Change in WC
Working Capital
-4 303 000
5 050 000
421 000
914 000
-548 000
-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)

EPS (average)
-26,06873 1,5382529 0,07726225 3,64563503 7,07011305
Suggested DPS
DPS
0 578774338
New issue
Deduction
Fusioner
Share repurchase
Payout ratio
0,28
84
Appendix 28
Boliden Two Stage-DDM

Riskfree rate
Market Risk premium
Beta stable growth
Beta high growth
RoE stable growth
3,37%
0,055
1,29913
1,9971
10,52%
14,35%
2,5%
19,1%
0,8
Dividned 2005
DPS 2005
DPs 2010
High Growth Stage

1
2
3
4
5
Terminal value
Expected Growth
19,1%
19,1%
19,1%
19,1%
19,1%
EPS
Payoutratio
8,42
0,28
10,02
0,28
11,94
0,28
14,21
0,28
16,93
0,28
173,16
85
DPS
2,38
2,84
3,38
4,02
4,79

0,1435
0,1435
0,1435
0,1435
0,1435
5,458895
Appendix 29
Boliden Two-Stage FCFE

High Growth
FCFE 2001
FCFE 2002
FCFE 2003
FCFE 2004
FCFE 2005
Net income
-2237000
2 442 000
837000
-4303000
132000
63 000
519000
5050000
13000
3 509 000
652000
421000
1055000
2 859 000
1311000
914000
2046000
1 330 000
1229000
-548000
Debt ratio
0,77
0,76
0,69
0,55
0,55
Future Predictions
2006
2007
2008
2009
2010
Expected growth
Cost of Equity
19,1%
19,1%
19,1%
19,1%
19,1%

FCFE 2006
FCFE 2007
FCFE 2008
FCFE 2009
FCFE 2010
Terminal Value
14,35%
14,35%
14,35%
14,35%
14,35%
Discounted FCFE
2675252
3185579
3793254
4516848
5378473
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
120 kr
2006-01-31 UBS
140 kr
116 kr
86
FCFE
-1626715
-981059
-993787
-46916
2246680
Appendix 31
Ericsson
Consolidated
31/12/2001 31/12/2002 31/12/2003 31/12/2004

th SEK
th SEK
th SEK
th SEK
12 months 12 months 12 months 12 months
Local GAAP Local GAAP Local GAAP Local GAAP
Operating revenue (Turnover) 240 046 000 149 746 000 119 279 000 136 907 000
Sales
231 839 000 145 773 000 117 738 000 131 972 000
Costs of goods sold
173 900 000 104 224 000 78 901 000 70 864 000
Gross profit
66 146 000 45 522 000 40 378 000 66 043 000
92 519 000 66 821 000 51 617 000 37 105 000
-26 373 000 -21 299 000 -11 239 000 28 938 000
Financial revenue
3 022 000
4 253 000
3 995 000
3 541 000
Financial expenses
5 782 000
5 789 000
4 859 000
4 081 000
Financial P/L
-2 760 000 -1 536 000
-864 000
-540 000
P/L before tax
-29 133 000 -22 835 000 -12 103 000 28 398 000
Taxation
-9 045 000 -4 310 000 -1 460 000
9 077 000
P/L after tax
-20 088 000 -18 525 000 -10 643 000 19 321 000
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Extr. and other P/L
-1 176 000
-488 000
-201 000
-297 000
-21 264 000 -19 013 000 -10 844 000 19 024 000
31/12/2005
th SEK
12 months
Local GAAP
156 707 000
151 821 000
82 369 000
69 452 000
41 254 000
33 084 000
2 653 000
2 402 000
251 000
33 335 000
8 875 000
24 460 000
0
0
0
24 460 000
Appendix 32
Ericsson Growth rate

2 001
2 002
2 003
2 004
2 005
-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
Shareholders equity
Cash
Short-term debt
Long-term debt
250 314 000
250 056 000
208 267 000
182 372 000
183 040 000
208 829 000
105 920 000

49 944 000
91 632 000
86 305 000
62 771 000
69 420 000
53 752 000
65 840 000
45 705 000
58 979 000
81 957 000
21 345 000
0,62
0,71
0,63
0,66
0,57
0,49
Capital Expenditure
Depreciation
Change in WC
Noncash WC
No. Of Shares
EPS (year end)

EPS (average)
Suggested DPS
DPS
New issue
Deduction
Fusioner
Share repurchase
Payout ratio
93 888 000
-22 331 000
3 957 000
-13 296 000
15 576 000
27 171 000
9 781 000
7 149 000
6 531 000
4 740 000
6 073 000
9 834 000
103 722 000
-23 825 000

79 897 000
-3 894 000
76 003 000
15 178 000
91 181 000
-14 985 000

76 196 000
7 909 000 000 15 820 000 000 16 132 258 678 16 132 258 678 16 132 258 678
-2,6886
-1,2018
-0,6722
4 296 000 000 -28 297 000 000

4 295 000 000
645 000 000
198 000 000

206 000 000
0,543
1,5162
277 000 000 4 016 000 000

292 000 000 4 133 000 000
155 000 000 28 940 000 000
0,013
31%
158 000 000
0,018
142%
0
0,256
1415%
0
156 000 000
-2 000 000
150 000 000
-15 000 000
-117 000 000
-0,20
-0,03
-0,02
0,02
0,17
88
0,041
1,1793
Appendix 34
Ericsson Two-stage DDM

Riskfree rate
Market Risk premium
Beta stable Growth
Beta High Growth
RoE stable growth
3,37%
5,50%
0,7979
0,7979
7,76%
7,76%
2,50%
2,5%
0,5
High Growth Stage

1
2
3
4
5
Terminal value
Reverse spit 1:5
Expected Growth EPS

PayoutratioDPS
Cost of Equity
2,5%
1,55
0,17
0,26259962
0,06552
2,5%
1,59
0,17 0,269164611
0,06552
2,5%
1,63
0,17 0,275893726
0,06552
2,5%
1,67
0,17 0,282791069
0,06552
2,5%
1,72
0,17 0,289860846
0,06552
16,72
83,60
89
In june 2010 Ericsson made a reverse stock split 1:5
Appendix 35
Ericsson Two-stage FCFE

High Growth
FCFE 2001
FCFE 2002
FCFE 2003
FCFE 2004
FCFE 2005
Net income
-21 264 000
-22 331 000
9 781 000
9 834 000
-19 013 000
3 957 000
7 149 000
-23 825 000
-10 844 000
-13 296 000
6 531 000
-3 894 000
19 024 000
15 576 000
4 740 000
15 178 000
24 460 000
27 171 000
6 073 000
-14 985 000
Future Predictions
2006
2007
2008
2009
2010
FCFE 2006
FCFE 2007
FCFE 2008
FCFE 2009
FCFE 2010
Terminal Value
Expected growth
Cost of Equity
2,5%
2,5%
2,5%
2,5%
2,5%
7,76%
7,76%
7,76%
7,76%
7,76%
Discounted FCFE
21905207
22452838
23014159
23589513
24179250
471312489
Stock Price
Reverse split 1:5
437378682
27
135,56
Appendix 36
Date
Company
Target price
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
32 kr
90
Debt ratio
0,71
0,63
0,66
0,57
0,49
FCFE
-14838771
-9144200
-2678249
7887893
21370934
Appendix 37
H&M
Consolidated
30/11/2001 30/11/2002 30/11/2003 30/11/2004 30/11/2005

th SEK

Sales
Costs of goods sold
Gross profit
Financial revenue
Financial expenses
Financial P/L
P/L before tax
Taxation
P/L after tax
Extr. and other P/L
th SEK
th SEK
th SEK
th SEK
12 months
12 months 12 months
12 months
12 months
Local GAAP
Local GAAP
Local GAAP
39 698 800
45 522 300
48 237 700
53 695 000
61 262 200
39 698 800
45 522 300
48 237 700
53 695 000
61 262 200
n.a.
n.a.
n.a.
n.a.
25 080 700
n.a.
n.a.
n.a.
n.a.
36 181 500
n.a.
23 008 600
n.a.
n.a.
n.a.
5 477 800
8 259 100
9 223 000
10 667 300
13 172 900
275 100
383 000
388 500
341 200
384 200
18 900
13 200
2 800
3 200
4 300
256 200
369 800
385 700
338 000
379 900
5 734 000
8 628 900
9 608 700
11 005 300
13 552 800
1 917 600
2 942 100
3 222 800
3 730 500
4 306 300
3 816 400
5 686 800
6 385 900
7 274 800
9 246 500
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
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
%
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
Total assets
Shareholders equity
Cash
Short-term debt
Long-term debt
2000
2001
2002
2003
2004
2005
15 700 400
20 410 300
25 198 700
25 761 700
28 127 300
33 183 200
3 033 200
777 400
4 038 100
940 600
5 287 200
823 800
4 703 800
961 200
4 885 100
1 033 200
6 484 600
774 800
0,24
0,24
0,24
0,22
0,21
0,22
3 541 800
3 656 100
1 009 000
2 112 300
3 714 800
900100
1050600
1125600
1232200
1451600
3 080 700
13725900
4 935 300
18661200
-4 045 000
14 616 200
1 914 400
16 530 600
2 090 500
18 621 100
827 536 000
827 536 000
827 536 000
827 536 000
827 536 000
4,61
6,87
7,72
8,79
11,17
Capital Expenditure
Depreciation
Change in WC
wc
No. Of Shares
EPS (year end)

EPS (average)
Suggested DPS
DPS
10645200
1 117 173 600 1 448 188 000 4 965 216 000 4 965 216 000 6 620 288 000
1,35
1,75
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
Market Risk premium
Beta stable Growth
Beta High Growth
RoE stable growth
High Growth Stage
Terminal value
Spit 2:1
3,37%
5,50%
0,6291
0,6291
6,83%
6,83%
2,50%
18,1%
0,75
Expected Growth EPS

Payoutratio
DPS
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
455,69
227,84
93
In june 2010 HM made a stock split 2:1
Appendix 41
H&M Two-stage FCFE

High Growth
FCFE 2001
FCFE 2002
FCFE 2003
FCFE 2004
FCFE 2005
Net income
3816400
3 541 800
900100
3080700
5686800
3 656 100
1050600
4935300
6385900
1 009 000
1125600
-4045000
7274800
2 112 300
1232200
1914400
9246500
3 714 800
1451600
2090500
Future Predictions
2006
2007
2008
2009
2010
Expected growth
Cost of Equity
18,1%
18,1%
18,1%
18,1%
18,1%

FCFE 2006
FCFE 2007
FCFE 2008
FCFE 2009
FCFE 2010
Terminal Value
6,83%
6,83%
6,83%
6,83%
6,83%
Discounted FCFE
6903033
8152242
9627513
11369757
13427287
317847807
297526592
Stock Price
Split 2:1
360
179,77
Appendix 42
Date
Company
Target price
330 kr
350 kr
2006-01-26 credit Suisse
200 kr
2006-01-27 hman
290 kr
320 kr
280 kr
340 kr
2006-01-27 Carnegie
350 kr
94
Debt ratio
0,24
0,24
0,22
0,21
0,22
FCFE
-510131
-25262
9632364
5068294
5845247
Appendix 43
HOLMEN
Consolidated

Sales
Costs of goods sold
Gross profit
Financial revenue
Financial expenses
Financial P/L
P/L before tax
Taxation
P/L after tax
Extr. and other P/L
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
17062000
16578000
16239000
16067000
17075000
16655000
16081000
15816000
15653000
16319000
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
2449000
2713000
2338000
1835000
1973000
44000
20000 n.a.
43000
11000
199000
169000
212000
224000
244000
-155000
-149000
-212000
-181000
-233000
2294000
2564000
2126000
1654000
1740000
108000
605000
675000
443000
484000
2186000
1959000
1451000
1211000
1256000
n.a.
n.a.
n.a.
n.a.
0
n.a.
n.a.
n.a.
n.a.
0
0
0
0
0
0
2186000
1959000
1451000
1211000
1256000
Appendix 44
Holmen Growth Rate

2001
Operating revenue (Turnover) 17062000
%
2002
16578000
-2,8%
2003
16239000
-2,0%
2004
2005
16067000 17075000
-1,1%
6,3%
Sales
%
%
16081000
-3,4%
1959000
-10,4%
15816000
-1,6%
1451000
-25,9%
15653000 16319000
-1,0%
4,3%
1211000 1256000
-16,5%
3,7%
16655000
2186000
95
Appendix 45
Holmen important data

Year end
Total assets
Shareholders equity
Cash
Short-term debt
Long-term debt
2000
2001
2002
2003
2004
2005
24 394 000
24 948 000
26 967 000
26 358 000
26 567 000
32 183 000
3 148 000
4 232 000
5 455 000
5 421 000
4 707 000
7 075 000
3 621 000
7 371 000
4 915 000
7 803 000
7 837 000
8 267 000
0,30253
0,43595
0,43690
0,41703
0,47871
0,50039
-2 942 000
1 113 000
181 000
-1 517 000
2 230 000
Capital Expenditure
Depreciation
1 045 000
1 126 000
1 153 000
1 166 000
1 188 000
1 167 000
Change in WC
Working Capital
4 182 000
-3 872 000
310 000
539 000
849 000
903 000
1 752 000
-1 117 000
635 000
-2 125 000
-1 490 000
79 972 451
84 187 870
84 187 870
84 756 162
84 756 162
No. Of Shares
EPS (year end)

EPS (average)
Suggested DPS
DPS
27,33441295 23,26938548 17,23526204
14,28804669 14,81898154
5 516 000 000 800 000 000 880 000 000
3 199 000 000 848 000 000
68,97375197 9,502556603 10,45281226
37,74356843 10,00517225
New issue
Deduction
Fusioner
Share repurchase
Payout ration
474000000
2,523330284 0,408371618 0,606478291
96
2,641618497 0,675159236
Appendix 46
Holmen Gordon Growth Model

Riskfree rate
Market Risk premium
Beta
3,37%
0,055
0,7
7,22%

RoE stable growth
Dividned 2005
DPS 2005
DPs 2010
2,5%
848 000 000

10
11,32
Gordon Growth Model 2010
246
97
Appendix 47
Holmen Free Cash Flow To Equity

Net income
FCFE 2001
FCFE 2002
FCFE 2003
FCFE 2004
FCFE 2005
2186000
1959000
1451000
1211000
1256000
-2942000
1113000
181000
-1517000
2230000
Depreciation
Change in WC
Debt ratio
FCFE
1126000
-3872000
0,435946769
1153000
539000
0,436904365
1166000
903000
0,417027089
1188000
-1117000
0,478714194
1167000
-2125000
0,500388404
Future Predictions
2006
2007
2008
2009
2010
FCFE 2006
FCFE 2007
FCFE 2008
FCFE 2009
FCFE 2010
Terminal Value
Expected Stable Growth Cost of Equity

2,5%
2,5%
2,5%
2,5%
2,5%
7,22%
7,22%
7,22%
7,22%
7,22%
Discounted FCFE
1831252
1877034
1923959
1972058
2021360
43896055
Stock Price
1707939
1632753
1560876
1492164
1426476
40940174
483
Appendix 48
Date
Company
Target price
2005-11-01 Credit Suisse
236 kr
2006-01-18 Affrsvrlden
350 kr
2006-02-06 UBS
250 kr
293 kr
98
6664583
1678015
1498804
3203354
1786588
Appendix 49
TeliaSonera
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
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
19 255 000 33 819 000 24 152 000 23 588 000 27 085 000
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
n.a.
n.a.
n.a.
n.a.
0
n.a.
n.a.
n.a.
n.a.
0
Extr. and other P/L
-22 000
-70 000
-969 000 -1 300 000
0
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
-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
Total assets
Shareholders equity
Cash
Short-term debt
Long-term debt
2000
122715000
2001
2002
2003
2004
2005
94875000
172812000
153042000
153145000
163094000
60 179 000
113 949 000
115 834 000
129 113 000
135 694 000
33151000
33256000
26739000
41220000
39827000
52880000
30573000
43653000
35111000
28794000
30270000
37811000
0,54
0,72
0,54
0,49
0,42
0,42
-29392000
53189000
-1289000
10424000
5773000
Capital Expenditure
Depreciation
8222000
10536000
20844000
17707000
15596000
13188000
Change in WC
WC
-1776000
8300000
6524000
-12507000
-5983000
12428000
6445000
-1683000
4762000
5649000
10411000
3 001 200 000 4 605 756 725 4 675 232 069 4 675 232 069
4 490 457 213
No. Of Shares
EPS (year end)

EPS (average)
Suggested DPS
DPS
New issue
Deduction
Fusioner
Share repurchase
Payout ratio
0,612
-1,752
1,942
2,311
3,050
1500600000
600000000
1842302690
4675000000
5 610 000 000
0,5
0,1
0,4
1,0
1,2
0 1 604 556 725

0
0
69 475 344
10 162 617 080

0,82
100
-0,07
0,20
0,43
0,41
Appendix 52
TeliaSonera Gordon Growth Model

Riskfree rate
Market Risk premium
Beta
3,37%
0,055
0,6268
6,82%

RoE stable growth
Dividned 2005
DPS 2005
DPS 2011
2,5%
0,6
5 610 000 000
1,2
2
Stock price
49,1
Appendix 53
TeliaSonera FCFE
Net income
FCFE 2001
FCFE 2002
FCFE 2003
FCFE 2004
FCFE 2005
1 838 000
-8 067 000
9 080 000
12 964 000
13 694 000
-29392000
53189000
-1289000
10424000
5773000
Future Predictions
2006
2007
2008
2009
2010
FCFE 2006
FCFE 2007
FCFE 2008
FCFE 2009
FCFE 2010
Terminal Value
Expected Stable Growth Cost of Equity

2,5%
2,5%
2,5%
2,5%
2,5%
7,22%
7,22%
7,22%
7,22%
7,22%
Discounted FCFE
15090882
15468154
15854858
16251229
16657510
361736174
14074689
13455098
12862783
12296542
11755228
337377517
Stock Price
75,1
101
Depreciation
Change in WC
Debt ratio FCFE
10536000
8300000
0,72 10810851
20844000
-12507000
0,54 -17262675
17707000
12428000
0,49 12462493
15596000
-1683000
0,42 16958516
13188000
5649000
0,42 14722811
Appendix 54
Date
Company
Target Price
2005-11-28 Handelsbanken Capital markets
45 kr
44,20 kr
2005-12-21 Deutshe Bank
45,50 kr
2006-02-08 Dresdner Kleinwort
46 kr
Appendix 55
Volvo
Consolidated

Sales
Costs of goods sold
Gross profit
Financial revenue
Financial expenses
Financial P/L
P/L before tax
Taxation
P/L after tax
Extr. and other P/L
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
190740000 186198000 183291000 211258000 240596000
189280000 186198000 183291000 210401000 240559000
155592000 151569000 146879000 163947000 186662000
35148000 34629000
36412000
47311000
53897000
35824000 32283000
30529000
33111000
35783000
-676000
2346000
5883000
14200000
18151000
1275000
1708000
1296000
820000
835000
2465000
2041000
5522000
2441000
972000
-1190000
-333000
-4226000
-1621000
-137000
-1866000
2013000
1657000
12579000
18014000
-326000
590000
1334000
3184000
4908000
-1540000
1423000
323000
9395000
13106000
n.a.
n.a.
n.a.
n.a.
0
n.a.
n.a.
n.a.
n.a.
0
73000
-30000
-25000
-40000
0
-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%
-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
Shareholders equity
Cash
Short-term debt
Long-term debt
200743000
260925000
239222000
231252000
222896000
257135000
53570000
58242000
88145000
87204000
74617000
86080000
76979000
81637000
79141000
74117000
108290000
70077000
0,55699078
0,672028361
0,671748418 0,685901095 0,687576269
0,69367064
Capital Expenditure
Depreciation
Change in WC
Working Capital
No. Of Shares
EPS (year end)

EPS (average)
Suggested DPS
DPS
-3355000
-7051000
-5889000
-2998000
9130000
6251000
9961000
10844000
9961000
10305000
9894000
43147000
-16556000
26591000
1461000
28052000
21907000
49959000
-8460000
41499000
-9304000
32195000
422400000
419400000
419400000
418500000
418500000
-3,473011364
3,32141154 0,710538865 22,35364397 31,18757467
3400000000
3400000000 3400000000 3400000000 5100000000
8,049242424
8,106819266 8,106819266 8,124253286 12,18637993
New issue
Deduction
Fusioner
Share repurchase
Payout ratio
-2,317655078
103
2,440775305 11,40939597
0,36344201 0,390744713
Appendix 58
Volvo Gordon Growth Model

Riskfree rate
Market Risk premium
Beta
3,37%
0,055
1,5115
11,7%

RoE stable growth
2,50%
Dividned 2005
DPS 2005
DPs 2010
EPS 2010
0,8
5100000000
12,2
22,6
28,2287025
Stock price
Split 5:1
315,1
63
Appendix 59
Volvo FCFE
Net income
FCFE 2001
FCFE 2002
FCFE 2003
FCFE 2004
FCFE 2005
-1467000
1393000
298000
9355000
13052000
-3355000
-7051000
-5889000
-2998000
9130000
Future Predictions
2006
2007
2008
2009
2010
FCFE 2006
FCFE 2007
FCFE 2008
FCFE 2009
FCFE 2010
Terminal Value
Expected Stable Growth

Cost of Equity
2,5%
2,5%
2,5%
2,5%
2,5%
11,7%
11,7%
11,7%
11,7%
11,7%
16539527
16953015
17376841
17811262
18256543
203772704
14809317,51
182455922
Stock Price
Split 5:1
436
87,2
104
Depreciation Change in WC Debt ratio FCFE

9961000
-16556000 0,67202836 8330168,81
10844000
1461000 0,67174842 6787486,5
9961000
21907000 0,68590109 -1604497,1
10305000
-8460000 0,68757627 16154277,7
9894000
-9304000 0,69367064 16136124
Appendix 60
Date
Company
2006-01-05 Deutsche Bank
2006-02-07 Credit Suisse
Target price
385 kr
400 kr
300 kr
380 kr
Appendix 61
SEK
Alfa Laval Actual Stock price
Alfa Laval DDM Valuation
Alfa Laval FCFE Valuation
Assa Abloy Actual Stock price
Assa Abloy DDM Valuation
Assa Abloy FCFE Valuation
Atlas Copco Actual Stock price
Atlas Copco DDM Valuation
Atlas Copco FCFE Valuation
Axfood Actual Stock price
Axfood DDM Valuation
Axfood FCFE Valuation
Boliden Actual Stock price
Boliden DDM Valuation
Boliden FCFE Valuation
Ericsson Actual Stock price
Ericsson DDM Valuation
Ericsson FCFE Valuation
H&M Actual Stock price
H&M DDM Valuation
H&M FCFE Valuation
Holmen Actual Stock price
Holmen DDM Valuation
Holmen FCFE Valuation
TeliaSonera Actual Stock price
TeliaSonera DDM Valuation
TeliaSonera FCFE Valuation
Volvo Actual Stock price
Volvo DDM Valuation
Volvo FCFE Valuation
% of actual
value
Differation
141,7
68,37
92,24
189,5
136,6549
139,9534
169,7
118,2329
167,6445
251,5
282,4426
335,7595
136,7
173,1581
215,0633
78,15
83,6
135,56
224
227,8443
179,7666
221,4
245,8248
483,0348
53,3
49,1
75,1
118,5
63
87,2
105
48,2%
65,1%
-51,8%
-34,9%
72,1%
73,9%
-27,9%
-26,1%
69,7%
98,8%
-30,3%
-1,2%
112,3%
133,5%
12,3%
33,5%
126,7%
157,3%
26,7%
57,3%
107,0%
173,5%
7,0%
73,5%
101,7%
80,3%
1,7%
-19,7%
111,0%
218,2%
11,0%
118,2%
92,1%
140,9%
-7,9%
40,9%
53,2%
73,6%
-46,8%
-26,4%
106

Equity Valuation Case Study

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Equity Valuation Case Study

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Stock Price Valuation

Masters thesis within Finance

Masters Thesis within Finance

Stock Price Valuation

Anders Karlsson and Niklas Josefsson

Valuation of stock price, Valuation Models, Case Study

This is a qualitative study where the collection of our empirical data

2 Theoretical Framework ........................................................ 6

The Efficient Market Hypothesis .................................................... 6

Methodological Approach ............................................................ 24

4 Empirical findings and Analysis ........................................ 34

Alfa Laval .................................................................................... 34

4.2.1 Assumptions ..................................................................... 37

Future Studies ............................................................................. 62

Appendix 55 ......................................................................................... 102

Figures And Tables

Figure 1 Stock Prices

The Efficient Market Hypothesis

Figure 2. Ross, Westerfield and Jaffe, 2008

Different types of Efficiency

Figure 3. Ross, Westerfield and Jaffe

Discounted Cash Flow (DCF)

Dividend Discount Model (DDM)

Price of stock with zero growth dividends

Price of stock with constant growth dividends (Gordon Growth Model)

Price of stock at time N with constant growth dividends (Terminal Value)

Price of stock with two and three stage growth dividends

Price of stock with zero growth dividends

Price of stock with constant growth dividends (Gordon Growth

= Required rate of return for equity investors

Price of stock at time N with constant growth dividends (Terminal Value)

= Steady state growth rate forever after year n

Two-stage Dividend Discount Model

Three-stage Dividends Discount Model

When a firm is in a three stage it is first assumed to be in an extraordinary growth phase

Modified Dividend Discount Model

Free Cash Flow to Equity Discount Models

Cash to stockholders to FCFE ratio

Constant Growth FCFE Model

Two-stage FCFE Model

Three-stage FCFE Model (E Model)

= End of initial high-growth period

Figure 4, Future Growth

Outline of the Study

The research process of the thesis

Reflections and Discussion

Inductive vs. Deductive

Qualitative vs. Quantitative

Table 1, Sources used in the study

Criticism of the Sources

The Approach and Structure of the Thesis

Validity and Reliability

Empirical findings and Analysis

Figure 6, Alfa Laval stock price valuation

Figure 7, Assa Abloy stock price valuation

Figure 8, Atlas Copco stock price valuation

Figure 9, Axfood stock price valuation

Figure 10, Boliden stock price valuation

Figure 11, Ericsson stock price valuation

H&M was established in Vsters, Sweden, in 1947 by Erling Persson, HM (2011).

Hennes & Mauritz

Figure 12, H&M stock price valuation

Gordon Growth Model