Hormel Finance Project

Company Project—part 4

I need to use the company Hormel, and the information needed can be gotten

from the links below;

Hormel

https://s25.q4cdn.com/701713307/files/doc_financials/2021/ar/FinalAR2021.pdf

https://www.nasdaq.com/market-activity/stocks/hrl/earnings

Use the most recent annual financial statements (provided below).

Indicate which firm you used at the top of the project.  That makes it easier for me to sort them for grading purposes.

            Remember you are not allowed to work with other students.

 

Questions:

 

 

1)         NASDAQ’s official website provides consensus earnings forecasts for the next three years.  Use those forecasts and the financial statements to calculate the value per share of the firm using the residual income valuation approach. In particular, you should include the book value per share (make sure you show your work when calculating the number of shares outstanding) and the present value of the residual income for each of the next two years and the continuing value which reflects the sum of the value of the residual income for subsequent years. Assume for the purposes of this calculation that the firm will pay no dividends and that the firm does not issue or repurchase shares (so the number of shares outstanding does not change).  Make sure you calculate the expected return on common equity for each of the next three years as part of your calculation. Assume a required rate of return of 8%. To calculate the last term use the forecast for the third year, the book value from year 2, and the assumption of a 3 percent growth in residual income from year 3 forward.  The formula for estimated value of the firm is

 

V(0) = BV(0) + [(ROCE(1) –r ) * BV(0)] / [(1+ r)]

 

+ [(ROCE(2) – r ) * BV(1)] / [(1 + r)²]

 

+ [(ROCE(3) –r ) * BV(2)] / [(r – g) * (1 + r)²]

 

 

 

2)        Compare the estimated value per share from question 1 to the closing stock price per share for the end of the fiscal year end.  Use the market price from the fiscal year end date or if there is no price available for that date use the closing price on the previous day when trading occurred.  Do not use the current market price.  The per share price can typically be located at the firm’s website or may be available from a third party provider (such as Yahoo Finance). 

 

 

3)        Does your answer to question 2 suggest that investors (who determine the stock price) are assuming a growth rate of residual income that is faster or slower than three percent?   Select faster or slower, even if the difference is small.  Assume for the purposes of this question that the other assumptions we made match those made by investors.

 

 

4)         Repeat question 1 using your own earnings forecast for year 1 from part 3 of the project as EE₁.  Do not create a new value for BV₀ because it would be the same.  The required rate of return is still 8%.

To come up with earnings forecasts for years 2 and 3, assume that earnings grow by 6% from the year 1 forecast to year 2 and 6% from year 2 to year 3.  Still assume 3% growth in earnings from year 3 to year 4 and in subsequent years.

 

 

Make sure you:

 

• Answer all the questions.  Failure to do so will adversely affect your grade.
• Include a copy of the earnings forecasts. These change over time so it is important that we can see the forecasts that you used.
• Include any information from financial statements, especially the balance sheet, that you used.
• Use annual financial statements, not quarterly financial statements.
• Do not use edited and altered financial statements provided by third party providers.  Use the financial statements provided by the company at its official website.
• You may not work with other students on this assignment. It is an individual assignment.
• Show the math for your calculations with the steps clearly labeled. Do not use the calculations made by a third party provider.

 

 

Note:  Below are links to the most recent financial statements and to the earnings forecasts compiled by NASDAQ.

 

 

Company Websites and Earnings Forecasts

 

 

Hormel

 

https://s25.q4cdn.com/701713307/files/doc_financials/2021/ar/FinalAR2021.pdf

 

https://www.nasdaq.com/market-activity/stocks/hrl/earnings