Fair Price and Stock Valuation Techniques - Essay Example

Stock Valuation VALUATION OF GLAXOSMITHKLINE’S (GSK) STOCKS. The value of the firm can be estimated by finding the present value ofthe firm. This can be done using sophisticated models such as finding the present value of the firm’s free cash flows. However, the Gordon’s model can be applied to earnings per share to estimate the value of the share. The value of the firm (market capitalization) can then be derived by multiplying the value per share by the number of shares in issue.The Earnings per Share of GSK.

Key Fundamentals31-Dec-1131-Dec-1031-Dec-0931-Dec-0831-DecEPS 114.10p53.90p121.20p104.70p99.10p(Stock-analysis-on.net, 2012) The earnings growth to be used in Gordon’s model can be calculated as follows;114.10 = 99.10 * (1+g) ^4G= [(99.10/114.10)^¼]-1G = 0.036 = 3.6 %The cost of equity of GSK has been estimated as 9.38 %. (Stock-analysis-on.net, 2012)Gordon’s model Po=Eo (1+g) / (Ke-g) (Stoltz, 2007 p147). Po=114.10(1 +0.036) / (0.0938 – 0.036)Po =2045.11The fair value GSK’s equity share is £ 20.

45 according to the above estimation method. The market value per share of GSK share is currently at £ 13.85 (Londonstockexchange.com, 2012). If the estimation above were accurate, the share would be said to be undervalued by the market. The Gordon’s growth model has several weaknesses that may make the estimates not to be perfectly accurate. The model used above utilized a trend over 5 years to calculate earnings growth; this does not give a precise estimate. The data applied in the estimation stock’s value is historical (up to December 2011), the market changes from that time may have affected the share prices.

The model also assumes constantly growing earnings per share; this assumption is not realistic and may over value a stock. The information used by the market in valuing the stock includes past, present and future information, whereas the model only utilizes past data. (Stoltz, 2007).  Referencesstock-analysis-on.net. GlaxoSmithKline PLC (GSK) | Present Value of Free Cash Flow to the Firm (FCFF) [Online] (Updated 2012) Available at: http://www.stock-analysis on.net/NYSE/Company/GlaxoSmithKline-PLC/DCF/Present-Value-of-FCFF [Accessed On 6 November 2012]Londonstockexchange.com. gsk  glaxosmithkline plc  [Online] (Updated 2012) Available at : http://www.

londonstockexchange.com/exchange/prices-and-markets/stocks/summary/company-summary.html?fourWayKey=GB0009252882GBGBXSET0 [Accessed On 6 November 2012]STOLTZ, A. (2007). Financial management: fresh perspectives. Cape Town, Pearson/Prentice Hall South Africa.