Stock Price Valuation

A Case study in Dividend Discount models & Free Cash Flow to Equity models

Master‟s thesis within Finance

Authors: Anders Karlsson

Niklas Josefsson

Tutor: Urban Österlund

Jönköping 2011-09-30
Master‟s Thesis within Finance

Title: Stock Price Valuation

Authors: Anders Karlsson and Niklas Josefsson

Tutor: Urban Österlund

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 re-
search. 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 assump-
tions made for every company. After this an extended analysis is
presented, the purpose of this section is to get a better understand-
ing 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 dif-
ferent valuations models and that they work better in different situa-
tions. Also, none of the two models are very accurate when valuat-
ing 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 compa-
nies with high divided pay-out ratio.
Table of Contents

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

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

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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

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 Appendix 55 ......................................................................................... 102
Appendix 56 ......................................................................................... 103
Appendix 57 ......................................................................................... 103
Appendix 58 ......................................................................................... 104
Appendix 59 ......................................................................................... 104
Appendix 60 ......................................................................................... 105
Appendix 61 ......................................................................................... 105

Figures And Tables

Figure 1 Stock Prices .................................................................................... 3
Figure 2 Market Efficency ............................................................................. 6
Figure 3 Relationship among three different information sets ...................... 8
Figure 4 Future Growth ............................................................................... 10
Figure 5 The research process of the thesis .............................................. 25
Figure 6 Alfa Laval, Stock price valuation ................................................... 36
Figure 7 Assa Abloy, Stock price valuation ................................................. 38
Figure 8 Atlas Copco, Stock price valuation ................................................ 40
Figure 9 Axfood, Stock price valuation ........................................................ 42
Figure 10 Boliden, Stock price valuation ..................................................... 44
Figure 11 Ericsson, Stock price valuation ................................................... 46
Figure 12 H&M, Stock price valuation ........................................................ 48
Figure 13 Holmen, Stock price valuation ..................................................... 50
Figure 14 TeliaSonera, Stock price valuation .............................................. 53
Figure 15 Volvo, Stock price valuation ........................................................ 55
Figure 16 Stock Prices ................................................................................ 58

Table 1 Sources used in the Study .............................................................. 29

Table 2 Summarize of DDM and FCFE Valuations ...................................... 56

iv
1 Introduction
This chapter is an introduction to the thesis. First, a background about the subject is given followed by a
problem discussion with our main questions leading to the purpose of the thesis.

1.1 Background
Valuation is the process of forecasting the present value of the expected payoffs to share-
holders. 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 valu-
ation 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 compa-
ny‟s stock. The valuation model can be considered a formalization of the relationship that
is expected to exist between a set of corporate and economic factors and the market‟s valu-
ation 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 oc-
cupied a huge amount of effort over a long period of time. Attempts have ranged from
simple mechanical techniques for picking winners to hypotheses about the broad influences
affecting stock prices (Elton, Gruber, Brown, & Goetzmann 2011)

Casti. J (1998) mentions the simple observation, that there is no single best way to process
information. This led Arthur and Holland to the not-very-surprising conclusion that deduc-

1
tive methods for forecasting prices are, at best, an academic fiction. As soon as you admit
the possibility that not all traders in the market arrive at their forecast in the same way
(more about this in the section about market efficiency), the deductive approach of classical
finance theory begins to break down. So a trader must make assumptions about how other
investors form expectations and how they behave. He or she must try to “psyche out” the
market. But this leads to a world of subjective beliefs and to beliefs about those beliefs. In
short, it leads to a world of induction rather than deduction.

Sweden and most of the world for that matter has recently been in a deep financial reces-
sion, 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 mod-
els 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 corpo-
ration, 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 pre-
dicted variables to determined a possible present values for the corporation‟s stock. Va-
riables 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, Damo-
daran (2002).

2
 400

350 Alfa Laval

300 Assa Abloy

Atlas Copco
250
Axfood
200
Boliden
150 Ericsson

100 H&M
Holmen
50
TeliaSonera
0
Volvo
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
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 usual-
ly a long term prediction for the corporation where market fluctuations would equal out.
Both of this models use all future cash flows until perpetuity and then it is discounted back
to today or a time of preference that could be compared with the actual price to see if the
stock is undervalued or overvalued.

In the graph above you can also see that the different companies that we decided to value
tend to move in somewhat the same direction with some companies being less sensitive to
the market and some more. In the graph above we also see the effect of the stock split that
Atlas Copco did during 2005.

1.2 Problem Discussion

The key to successfully investing in different assets, stocks and firms lies in understanding
that every asset, financial as well as real has a value. A real asset is an assets used to produce
goods and services, financial assets are assets such as bonds and stocks. Any asset can be
valued but some are easier to value than others, and depending on valuation method you
may come up with different results (Damodaran, A. 2002)

3
There are a various number of different valuation methods to choose from when doing a
forecast of a firm, you have both sophisticated and unsophisticated valuation methods. So-
phisticated methods are based on net present value (NPV) of the financial performance of
multiple future periods. Unsophisticated valuation methods are simpler methods based on
the multiple of a single period‟s performance measure to price relative to the same measure
for comparable firms (Flöstrand, P. 2006). Our use of models in this study will involve
models such as Dividend Discount Model (DDM) with different growth stages and Free
Cash Flow to Equity (FCFE). The dividend discount model is based upon the premise that
the only cashflows received by stockholders is dividends. According to Damodaran, A
(2002) even if we use the modified version of the model and treat stock buybacks as divi-
dends 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 defini-
tion 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 calculat-
ing 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 en-
tire thesis. Our focus will be on companies which pay out dividends, this is important since
dividends are a crucial part when calculating firm‟s stock price. Our choice of models is
Dividend Discount Model and Free Cash Flow to Equity since these models are most ap-

4
propriate when dealing with dividends. We also decided to limit our search of companies
only to large cap on the Swedish stock exchange market. The number of companies we will
evaluate will be 10, we believe that this will be enough in order to get a fair result.

Furthermore, the thesis will focus on the recommendations of the literature, therefore the
other areas of the valuation process will not be carried out by thorough analysis, rather as-
sumptions and simplifications will be made. When choosing between stock A, B and C we
only focus on the stock that is most traded.

5
2 Theoretical Framework
This Chapter explains the necessary theories used to answer the problem. First, the theory of efficient mar-
kets 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 re-
flect 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 re-
flected 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 (El-
ton, 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 ad-
just to the “right price”.

6
As mentioned earlier a necessary condition for market efficiency to hold true is that the
cost of acquire information and trading is zero. Ross, Westerfield and Jaffe (2008) also
mentions three other conditions that cause market efficiency: Rationality, independent dev-
iations from rationality and arbitrage.

Rationality is important since when new information is released in the marketplace, all in-
vestors 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 irratio-
nalities offset each other we could have a market that is efficient even though most inves-
tors would be classified as less than fully rational. It is however arguably not realistic to as-
sume 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 ra-
tionality there is an assumption that will produce market efficiency (Ross, Westerfield and
Jaffe 2008).

Arbitrage, assumes that there are two types of people in the market, irrational amateurs
and the rational professionals. Amateurs would from time to time make irrational decisions
and think that a stock is undervalued and sometimes the opposite. When the behavior of
the amateurs does not cancel out and create a efficient market, the behavior of professional
get important. Professionals are methodical and rational, and with thoroughly studies of the
companies they find objective evidence of the true value of the stock and act thereafter
pushing the prices to the true value and create an efficient market as long as the arbitrage
of professionals dominates the speculation of amateurs (Ross, Westerfield and Jaffe 2008).

7
2.1.1 Different types of Efficiency

Up to this point we have been discussing market efficiency, as being a market that directly
without any delay responds to all new information, this is considered to be a strong form
of market efficiency. Now two new types of efficiency are introduced, the weak and the
semistrong form of efficiency.

The weak form of market efficiency is when security prices already include all information
found in past prices and volume. If this holds true there would be no reason to use tech-
nical analysis to find deviation in stock price.

Weak form efficiency is often represented mathematically as:

The random term in the formula above is there to cover new information that we at time t
do not know. The random error is not predictable from earlier data hence the stock price
will follow a random walk ( Ross, Westerfield and Jaffe 2008).

Figure 3. Ross, Westerfield and Jaffe

8
The semistrong form as seen in the second to largest circle above hold a stronger defini-
tion to what is an efficient market. In the semistrong form of an efficient market all infor-
mation set by past prices and volume as well as all other public information has to be in-
cluded 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 ef-
ficient 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 in-
formation.

2.2 Discounted Cash Flow (DCF)

Discounted cash flow valuation is one of our main ways of approaching valuations, and ac-
cording to (Damodaran, A. 2002, p. 14) DCF is the foundation on which all other ap-
proaches are built upon. In order to do relative valuation correctly we need to understand
the fundamentals of discounted cash flows valuation. Moreover discounted cash flow
models are based on the concept that the value of a share of stock is equal to the Present
Value (PV) of the cash flow that the stockholders expects to receive from it. (Elton, E,
Gruber, M, Brown, S, Goetzmann, W. 2011)

Discounted cash flow valuation is a method of valuing a project, company, or asset using
the concepts of the time value of money. All future cash flows are estimated
and discounted to give their present values (PVs) – the sum of all future cash flows, both
incoming and outgoing, is the net present value (NPV), which is taken as the value or price
of the cash flows in question. This section will present a result of the firm‟s present value
as well as the value of the stock

Basis for discounted cash flow valuation has its foundation in the net present value (NPV),
where the value of any asset is present value of expected future cash flows that the asset
generates.

9
Where,

n = Life of the asset

= Cash flow in period t

r = Discount rate reflecting the riskiness of the estimated cash flows

Obviously the cash flows will vary from asset to asset, the discount rate will be a function
of the riskiness of the estimated cash flows, the riskier assets the higher rates and vice versa
for safer projects. (Damodaran, A. 2002, p. 15)

According to Neale, B & McElroy, (2004, p 314-315) the main problems with the DCF ap-
proach 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 under-
standing 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, as-
suming that the price of a stock is equivalent to the sum of all of its future dividend pay-
ments discounted to the present value. Within this model you can use a set of different ap-
proaches 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 compa-
ny'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 al-
ways 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 im-
portance of growth in all DDM‟s, since small variations in growth will make a large impact
on the value.

Where,

= Next year‟s dividend

11
 = Required rate of return for equity investors

g = Dividend Growth Rate

Further it is important to recognize that growth cannot exceed the market capitalization
rate. If dividends were expected to grow forever at a rate faster than k, the value of the
stock would be infinite (Bodie, Z, Kane, A, Marcus, A. 2008). It might be nonsensical, but,
in reality this occurs often for companies in the real market especially for firms that are in a
period of high growth, usually this growth settles down after a period of time to a more
normalized growth, more about this in chapter 2.6. When the company that is being valued
is experiencing a growth rate higher than the discount rate there are two ways to handle it
so the DDM would be effective. First, the growth could be considered as a long term aver-
age 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. Alterna-
tively, 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 (Ter-

minal 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 con-
sider both the initial hyper growth stage and then the subsequent constant growth stage in
order to value the price of the stock of a company. The constant growth stage is similar to
the Gordon growth model where we value the price of a constant growth stock.

Where,

= Price (terminal value) at end of year n

= Expected dividends per share in year n (

= Cost of Equity (st: Stable growth period)

12
 = Steady state growth rate forever after year n

2.3.4 Two-stage Dividend Discount Model

As mentioned above companies tend to initially grow very rapidly in its first few years and
then subsequently settling down to a constant growth rate, however to value the stock price
of a company with non-constant growth increases the difficulty, one way is to assume that
the company instead have a two stage growth.

Where,

= Stock price at time=0

= Expected dividends per share in year t

= Cost of Equity (hg: High Growth period; st: Stable growth period)

= Price (terminal value) at end of year n

g = Extraordinary growth rate for the first n years

= Steady state growth rate forever after year n

Two-stage DDM is better suited than Gordon growth model for companies that has not
yet reached a state of steady growth, but it far from a perfect way to value stock price. First
there are now two different growths to be considered, we have the high growth stage
which could be difficult to determine since the growth can vary heavily from year to year.
Then the constant growth rate has to be determined for the perpetuity. Second, you have
to determine for how many years the high-growth phase will continue before the firm will
enter into a steady state. Third the two-stage DDM implies that the growth would abruptly
end and that the company would then immediately enter a constant growth state, more rea-
listic 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 speci-
fied. After this the growth rate declines linearly over the transition period to a stable
growth rate. Here we use the following formula:

Where,

= Stock price at time=0

= Expected dividends per share in year t

= Growth rate in high growth phase (lasts for n1 periods)

= Steady state growth rate forever after year n

= Payout ratio in high growth phase

= Payout ratio in stable growth phase

= Cost of Equity (hg: High Growth phase; t: transition phase; st: Stable growth
phase)

Three-stage DDM is superior to the two-stage DDM in the way that there is a transaction
phase where you can account for the time it takes to go from a initial high growth phase to
a normal growth. With the extra input there is also some negative aspects, as mentioned
before it‟s difficult to determined for how long the initial high grow phase will continue
this is still a problem in the three-stage model but know there is also the aspect of deter-
mine 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 af-
fects 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 divi-
dends 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 re-
sidual 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 Free Cash Flow to Equity Discount Models

2.5.1 Cash to stockholders to FCFE ratio

The Cash to stockholders to FCFE ratio shows how much of the cash available to be paid
out to stockholders in the firm that is actually paid out to them, in form of dividends and
stock repurchases. (Damodaran, A. 2002)

A value of 1 would imply that the firm is returning all the available cash after meeting its
expenses to the owners. Therefore a value below 1 means that the firm is not paying out all
that they can afford, and keep some of it in the firm, reasons for this could be amongst
others to reinvest it in positive net present value project, increase cash balance and future

16
acquisitions of firms. If the firm pays out more than they can afford the value would be
above 1, this is usually not an option in the long-run and it means that the firm is taking the
extra money from existing cash balances or by issuing new securities.

2.5.2 Constant Growth FCFE Model

The constant growth model is used to value firms that are only growing at a stable rate.
This model is very similar to the Gordon growth model, with the difference that FCFE is
used instead of dividends. Important to this model is that the growth rate is reasonable
since “it continues forever”. The growth rate should be set to the nominal growth rate in
the economy in which the company operates or close to this if it could be justified. If a
constant growth FCFE model is chosen, it is also implied that the firm is a stable firm and
that it has the characteristics of a stable firm. (Damodaran, A. 2002)

Where,
= Value of stock today
= Expected FCFE next year
= Cost of Equity
= Growth rate in FCFE for the firm forever

2.5.3 Two-stage FCFE Model

Two-stage FCFE model is just as two-stage DDM, used to value a firm that first have a
high growth that after some years will turn in to a stable growth. Two-stage models has an
advantage to three-stage models in that it is not so sophisticated and you don‟t have to de-
termine 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 rela-
tively predictable which makes valuation easier. Depending on what stage the company be-
longs 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 in-
vestment 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 in-
creases. 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 com-
monly 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 com-
pany 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 compa-
nies continue as small companies without or with small expansion potential. Not all com-
panies 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 in-
crease 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 div-
idends 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 rein-
vestment 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 dif-
ferent 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 Di-
king (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 anal-
ysis 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, Gra-
ham, Dodd And Cottle‟s (1962) and financial statement measures were linked to equity
value in an ad hoc way, so little guidance was given for understanding the implications of
i.e. a particular ratio, a profit margin or an inventory turnover for equity value. Nor was
comprehensive scheme advanced for identifying, analyzing and summarizing financial
statement information in order to draw a conclusion as to what the statements as a whole
really say about the equity value. Penman, S.H and Nissim, D. (2001, p 110)

A considerable amount of accounting research in the years since Graham, Dodd and Cottle
has been involved in discovering how financial statements inform about equity value. Ac-
cording 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, high-
dividend paying stocks.

A standard critique of the dividend discount model is also that it provides a too conserva-
tive 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 un-
utilized assets cannot be valued separately and added on the value from the dividend dis-
count 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 stock-
holders 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 cur-
rent 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 ge-
neralizing the findings from these studies. First one, is that the dividend discount model
does not beat the market every year, there have been individual years where the model has
significantly underperformed the market.

23
3 Methodology
This chapter motivates the research philosophies and research approach used in this thesis. It will also de-
scribe 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 inves-
tigation. 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 pur-
pose 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 theo-
retical framework which deals with important concepts for the understanding of the sub-
ject such as mathematical models, valuations models and the Dividend Discounted Model
and Free Cash Flow To Equity models in particular. The theoretical framework is devel-
oped 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 as-
sumptions 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 differ-
ent 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 in-
volved in the valuation process.

3.3 The research process of the thesis

PART 1

Background
PART 3

Empirical Findings and

Problem Discussion Analysis

PART 2
Extended Analysis
Theoretical Framework

Previous Research

PART 4

Conclusion

Reflections and Discus-

sion

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 abso-
lutely sure about the accuracy of the conclusion. With deduction you make logical conclu-
sions 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 theo-
retical constructions, the approach in economics consists of an ongoing interfacing of de-
duction and induction (Ethridge, D 2004). The result from a deductive reasoning is by ne-
cessity true, while a result from an inductive reasoning is probably true or has a high prob-
ability of being true. (Herrick, 1995)

However in the most research papers a combination of the two approaches is used, accord-
ing to Alvesson & Sköldberg, (1994) this is called an abductive reasoning. This abductive
approach begins with empirical findings but without disregarding the theoretical back-
ground. The analysis of the empirical findings can be combined with or preceded by re-
search 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 in-
duction.

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 im-
proved 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 ab-
ductive approach was most appropriate for this thesis.

3.5 Qualitative vs. Quantitative

According to Mark Saunders the purpose for using qualitative and quantitative methods is
to give a better understanding of the research. In order to determine the most preferable
method for our study it‟s essential to evaluate the underlying problem. (Saunders, M 2007)
With this research the authors intended to get a deeper knowledge regarding the metho-
dology 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 me-
thods, 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 ex-
ploratory 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 em-
phasize here is that the firm sample is going to be randomly selected in order to avoid data
to be biased The author‟s goal with this thesis is to find unique details about the analyzed
problem and being able to provide examples and through them make conclusions.

3.6 Data Search

To be able to carry out an investigation in the first place, it is imperative to obtain relevant
material to work with first. This is where the data search comes in.

In order to find the most appropriate theories and models for stock price valuation an in-
vestigation of existing material was conducted, leading to a previous research section. In
the stock price valuation area there are many sources of information, however the focus to
gain information in the subject where on non-fiction books including Damodaran (2002)
“Investment valuation: tools and techniques for determining the value of any asset.”

During the process of writing this thesis articles and books were found in the Jönköping
University‟s Library and by the use of databases such as JULIA and JSTORE. Another ap-
proach we used when collecting information on the subject was by looking at suggested
reading and reference lists from relevant working papers, books and articles. With latter
approach it was easier to access find reliable sources in order to establish a comfortable and
trustworthy theoretical framework. When we found the initial and new sources some key
words where used regularly, examples of key words: firm valuation, equity valuation, business
valuation, Dividend Discount Model, Free Cash Flow To Equity.

When conducting the data for our case study we used Amadeus, it is a statistical database
which contains of a large number of companies where all relevant financial information is
summarized. Hence, not all information needed for valuation is provided in Amadeus and
therefore we used the company‟s annual reports in order to fill the missing information.
We also used Damodaran (2002) “Investment valuation: tools and techniques for determining the value of
any asset.” when we made our assumption of future growth. Finally, we used different 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 impor-
tant 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 or-
der to answer its purpose. Firstly, we present our theoretical framework where our two dif-
ferent 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 infor-
mation 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 pre-
sented 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 suffi-
ciently 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 text-
books, 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 litera-
ture study we were able to establish a deep understanding for our valuation models. Instead
of focusing on gathering material on how analysts carry out their forecasts we decided to
elaborate the valuations models ourselves as it was reported in financial literature.

3.9 Validity and Reliability

This section will discuss the concepts of validity and reliability as measurements of the
quality of the thesis. Validity implies that the study really has examined what it meant to
and nothing else, whereas, reliability implies that the measurements are correctly executed
Thurén (1998). More importantly it will discuss how the approach and process of conduct-
ing this thesis can have affected the validity and reliability of the study‟s results.

3.9.1 Validity
Section 3.8, the approach and structure of the thesis, describe how the thesis was con-
ducted, 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 be-
tween 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 cru-
cial 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 cor-
rectly performed. When talking about the steadiness of the measures it is referred as the re-
liability of the study. In other words, despite consequences of who is conducting the stu-
dies, the result should be the same as long as the same method is used (Ghauri &
Grønhaug, 2005)

Furthermore, quantitative data will not be utilized to a high degree in the literature study,
which means that a fairly large part of the study is based on opinions and other subjective
perceptions. One can believe that this would make it less reliable since opinions and per-
ceptions differ from persons to persons. However, the case study should increase the relia-
bility 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 bi-
ased, however we determined that the cost of obtaining primary data was too high. There-
fore 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 informa-
tion gathered is not quantified, Holme & Solvang (1997). This issue is evident for every re-
searcher 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 li-
mitation 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 inaccura-
cy 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 well-
known 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 ap-
proach, however we believed that the different choices made within the research approach
best reflected our problem statement and guided us to fulfill our purpose.

33
4 Empirical findings and Analysis
In this chapter we present our findings from the valuation of the 10 companies. We analyze and present our
data together with assumptions made for every company.

4.1 Alfa Laval

Alfa Laval was started as AB Separator by Gustaf de Laval and Oscar Lamm Jr in 1883. In
2005 Alfa Laval sold their products in about 100 countries where 55 of them have their
own sales organization. 50 percent of the sales come from Europe while Asia stands for
about 30 percent and North and South America stands for 20 percent of the sales, Alfa
Laval annual report 2005.

In 2005 Alfa Laval had about 9500 employees, with most employees in Sweden, Denmark,
India, USA and France, Alfa Laval annual report 2005.

Alfa Laval‟s core operations are based on three key technologies: heat transfer, separations
and fluid handling. They are all of great significance for industrial companies, and Alfa
Laval holds leading global market positions within its fields of technical expertise.

4.1.1 Assumptions

Alfa Laval showed a great increase both in net income and revenue over the years of 2001-
2005. As seen in appendix 2 operating income increased by 8,2 percent and 8,4 percent in
2004 and 2005. The increase in net income is a lot more volatile and therefore more diffi-
cult 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 streng-
then their existing products or can add to new key products. We feel that Alfa Laval is un-
derestimating 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 an-
nually, 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 ra-
tio in 2005, we then assume after the high growth the payout ratio will go up to 0,9 in ma-
ture 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
140 SEK 100%
90%
120 SEK 80%
100 SEK 70%
80 SEK 60%
50%
60 SEK 40%
40 SEK 30%
20%
20 SEK 10%
0 SEK 0%

Figure 6, Alfa Laval stock price valuation

4.1.3 Two-stage FCFE

When using a two-stage FCFE instead we reached a higher target price of 369 SEK, which
could be considered high taking into account that the experts put their target prices be-
tween 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 com-
fortable 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 valua-
tion 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 clos-
est 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 bil-
lion 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 irre-
gularities in the growth in net income, with yearly growth varying from -99 percent to
16511 percent so we instead decided to use the growth in operating revenue, and looked at
the last years growth and made the assumption that on an average its reasonable that Assa
Abloy will continue to grow with approximately 8,3 percent over the next five years which
after it the growth will decline to a market growth of 2,5 percent. Also looking at the Assa
Abloy‟s annual statement 2005 we can see that Assa Abloy is planning on creating future
shareholder value from a combination of profitable organic growth based on the develop-
ment on new products and services, extended global market presence and continue im-
provements in efficiency and selective acquisitions of other companies. Further they men-
tion 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 in-
crease 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 va-
ried between 110 and 150 SEK, Which would make our target price right in there. The ac-
tual 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 Ab-
loy stock, our DDM valuation is as shown 72,1 percent of the actual value.

Assa Abloy
100%
180 SEK
90%
160 SEK 80%
140 SEK 70%
120 SEK 60%
100 SEK 50%
80 SEK 40%
60 SEK 30%
40 SEK 20%
20 SEK 10%
0 SEK 0%

Figure 7, Assa Abloy stock price valuation

4.2.3 Two-stage FCFE

Using the two-stage FCFE equity model, with the same assumptions as the two-stage
DDM gave us a target price of 140 SEK, which could be seen in appendix 12 or in the
graph above, 140 is still in the range of the other valuations from other companies but it
still a lot lower than the actual value of 189,5 SEK. In the graph above we can see that our
target price with the FCFE is only 73,9 percent of the actual value. The target price that
was closest to the actual value was Danske Bank that reached 79,2 percent of the actual
value.

38
4.3 Atlas Copco
Atlas Copco is a world leading provider of products and services ranging from compressed
air and gas equipment, generators, construction and mining equipment, industrial tools and
assembly systems, to related aftermarket and rental, Atlas copco(2011)a.

The history of Atlas Copco dates back as far as 1873, but the core business has remained
the same over the years, Atlas copco (2011)b. Atlas Copco‟s headquarter is located in
Stockholm, Sweden. During 2005 Atlas Copco had 27000 employees and revenue of 53 bil-
lion 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 be-
tween 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 At-
las 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 ac-
counting 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 Morgan Lehman Lehman Bear
Stock price Valuation Valuation Stanley Brothers Brothers Stearns

Figure 8, Atlas Copco stock price valuation

40
4.3.3 Two-stage FCFE

With the two-stage FCFE model we reached a target price with taking into account the
stock split of 167,64, which could be compared to the actual price of 169,7 SEK, which
was relatively close to the actual price. Actually the target price that was closest to the ac-
tual value including all the experts as seen in the graph above, it was 98,8 percent of the ac-
tual price or only 1,2 percent away from the actual price if you want to look at it that way.

4.4 Axfood
Axfood was founded in 2000 in the intents to create a consumer-oriented food retailer. It
was founded through the merger of Hemköp and D&D Dagligvaror, and the acquisition of
Spar Inn Snabbgross, Spar Sverige and Spar Finland. At the point of its establishment
Hemköp was listed on the Stockholm Stock Exchange and as an outcome of the merger
the listing was taken over by Axfood. Axfood is today listed on the Nasdaq OMX Stock-
holm AB‟s Large Cap list. (www.axfood.se). In 2005 Axfood had a market share of 13,5 in
Sweden and had 235 owned stores but a total of over 500 stores are connected to Axfood.

4.4.1 Assumptions
As mentioned earlier, the major limitation to valuation is the assumptions about the future
that you have to make. When valuing in Axfood we used data from the 2001-2005 annual
reports to value the firms future. With this data we assumed a future high growth of 10
percent for 5 years, and that the growth would then decline over 5 years to reach a stable
growth of 2,5 percent by 2015. The High growth is assumed from the fact that Axfood be-
tween 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 reason-
able. We have also been taking into consideration Axfood‟s operative goals, where they
have as a goal to grow with a profitable growth, with a high emphasis on profit. They are
also aiming for their own products to account for 25 percent of total revenue in 2006, up
from 20 percent in 2005. Further they are working to make Axfood more cost effective for
the future, Axfood årsredovisning 2005. Axfood‟s continued work to make their operations
more profitable and work to cut cost makes, together with our analyzes of earlier growth
makes us comfortable in a 10 percents yearly growth for the next five years.

41
4.4.2 3-stage DDM
With the assumptions made for Axfood we reach a assumed price of Axfood in the end of
2010 of approximately 282 SEK which could be compared to the actual price on the clos-
ing time 2010-12-30 where 251,5 kr. This is a bit higher than what HQ Bank valued Ax-
food in 2005-12-02, their target price was 240 SEK. The actual price of Alfa Laval on 2010-
12-30 was 251,5 SEK which as seen in the graph below is a little bit higher than the highest
of the experts but a little lower than our DDM value that was overvalued with 12,3 percent.

Axfood
130%
300 SEK 120%
110%
250 SEK 100%
90%
200 SEK 80%
70%
150 SEK 60%
50%
100 SEK 40%
30%
50 SEK 20%
10%
0 SEK 0%

Figure 9, Axfood stock price valuation

4.4.3 3-stage FCFE

With the same assumptions for both models we reached a price suggestion of 335,76 SEK
with the 3-Stage FCFE model. Comparing to the 3-stage DDM this is a fairly large increase
of the stock price. As seen in the graph above we can see how much the FCFE model ac-
tually 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 be-
tween 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 opera-
tions. Boliden is today listed on the Nasdaq OMX Stockholm AB‟s Large Cap list
(www.boliden.com)

4.5.1 Assumptions
We based our assumptions on the annual reports from 2001-2005, when calculating the
growth we could see that in fluctuations in growth in net income were enormous, between
2003 and 2004 Boliden had i.e. a growth in net income of over 8000 percent, see appendix
26. In order to get a more relevant future growth we decided to used the growth in Operat-
ing Turnover instead, see appendix for values. We weighted the growth in operating turno-
ver in order to get an assumed future high growth, this was 19,1 percent. This growth will
not last forever so therefore there will also be a period of stable growth which according to
Damodaran (2002) should be set to the market growth which is approximately 2,5 percent.
Consideration has also been taken of Boliden‟s goal to become Europe‟s leading copper
and zinc producer and according to Boliden annual report 2005 this will be achieved by
improving productivity and cost-effectiveness. Boliden also have many growth opportuni-
ties 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 fu-
ture in 2006, both internally and externally for boliden.

With their stated growth potential in the Boliden annual report 2005 and the our predic-
tions in historical growth we feel comfortable with our assumed rate of 19,1 percent as
high stage growth.

When calculating cost of equity in high growth we used a beta of 1,9971 from 2008, no
previous beta was found, (www.di.se). According to Damodaran (2002) the beta tends to
move towards 1 in stable growth so therefore we weighted the beta in high growth in order
to get the beta in stable beta which became 1,29913.

43
4.5.2 Two-Stage DDM
With the assumptions mentioned above calculated with the Dividend Discount Model we
reached a future stock price of 173,16 SEK as seen in appendix 30, this can be compared
to the actual stock price in 2010-12-30 of 136,7 SEK. When UBS valuate Boliden in 2006-
01-31 they predicted a target price of 140 SEK. All the experts target prices and our valua-
tions 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 140%
175 SEK
120%
150 SEK
100%
125 SEK
100 SEK 80%
75 SEK 60%
50 SEK 40%
25 SEK 20%
0 SEK 0%

Figure 10, Boliden stock price valuation

4.5.3 Two-Stage FCFE

Based on the same assumptions as for the Dividend Discount Model we reached a future
stock price with the Free Cash Flow To Equity Model of 215 SEK. This is a bit higher than
our predictions with the DDM and a as seen in the graph above it is a lot higher than the
actual price. When comparing to the experts target prices to our target price, our price was
more than twice some of the experts target prices for the period.

44
4.6 Ericsson
Ericsson was started in 1986 by Lars Magnus Ericsson, as a telegraph repair workshop,
Ericsson (2011) a. Since then the industry has grown and with it Ericsson has grown, today
Ericsson is a one of the world leadings providers of telecommunication equipment and
services for telecommunication operators worldwide, both for mobile and fixed network,
Ericsson (2011) b.

Ericsson is today listed on the Nasdaq OMX Stockholm AB‟s Large Cap list.

4.6.1 Assumptions
It is extra difficult to predict the future of Ericsson since it has changed so extremely over
the years of 2001-2005. To start with they dropped in operating revenue from 240 billion in
2001 to 119 billion kronor in 2003 and then started to grow again. In 2002 they also took
in 28 billion kronor in a new issue. We assumed for our valuations that Ericsson are a sta-
ble 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 de-
cided to use a two-stage model even though the growth would remain constant, and in-
stead 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 de-
veloped 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 in-
crease the capacity in cities. A disadvantage in the emerging markets are still that the sub-
scriber penetration is low in most of these markets. In the developed markets Ericsson still
see some potential to grow even though the already high penetration levels that exists,
Ericsson annual report 2005. As mentioned earlier a decision was made to use a two stage
model but to not to use a high growth stage and a low, it was just used to get the dividend
up to a level that we feel is reasonable in 2010. The use of a stable growth comes from as
mentioned earlier the analyze of historic growth rates and after reading Ericcson‟s annual
report 2005, where even though they look at the future as bright we cannot really see any
concrete indications that they would experience rapid growth in the future.

45
In 2008 Ericsson had a beta value of 0,7979 which would result in a cost of equity of 7,76
percent in a high growth stage. Further we assumed that the beta for Ericsson would re-
main constant going forward.

As mentioned earlier we decided to use a two-stage model even though the fact that we
predict that Ericsson are a stable corporation and will not experience a future high growth.
This may be a little unconventional but we feel that it‟s the best way to go with to value
Ericsson.

Its also important to know that Ericsson made a reverse stock split in June 2010 where 5
Ericsson shares was turned into 1. So the share price that we received was multiplied with 5
to get a price that could be compared with the stock price of Ericsson on closing day De-
cember 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 ac-
count 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 valua-
tions 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 225%
160 SEK 200%
140 SEK 175%
120 SEK 150%
100 SEK 125%
80 SEK 100%
60 SEK 75%
40 SEK 50%
20 SEK 25%
0 SEK 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 al-
so the experts target prices as seen in the graph above.

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

H&M does not have any factories themselves, instead they work with over 700 indepen-
dent 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 appen-
dix 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 compen-
sate a little if the growth would be lower but the period of high growth longer. When mak-
ing 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 in-
creased 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 in-
crease the catalogue and online sales by expanding outside the Nordic countries.

As mentioned earlier we do not see that H&M‟s growth could continue forever, especially
not at the rate that they grow at between 2001 and 2005. At the same time we cannot see
that they can expand more in many of their core markets and that after 5 more years of
high growth we feel comfortable with declining H&M growth to a stable growth 2,5 per-
cent 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 per-
cent.

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 ap-
pendix 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 per-
cent between our calculation and the actual value of the H&M stock price.

Hennes & Mauritz

225 SEK 100,00%
200 SEK 90,00%
175 SEK 80,00%
150 SEK 70,00%
125 SEK 60,00%
50,00%
100 SEK 40,00%
75 SEK 30,00%
50 SEK 20,00%
25 SEK 10,00%
0 SEK 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 includ-
ing the stock split which could be compared to the target prices that the expert set that in-

49
cluding the stock split would range from 100 to 175 SEK. Our target price is 13,77 percent
from the actual price, and 14,64 percent from the average actual price.

4.8 Holmen
Holmen is a forest industry group that manufactures printing paper, paperboard and sawn
timber and runs forestry and energy production operations. The company‟s extensive for-
est holdings and its high proportion of energy production are strategically important re-
sources for its future growth. Holmen‟s business concept is to grow and develop and to
run profitable and sustainable business within three product-oriented business areas for
printing paper, paperboard and sawn timber, as well as within two raw-material-oriented
business areas for forest and energy. Europe is the main market. Holmen is today listed on
the Nasdaq OMX Stockholm AB‟s Large Cap list. (www.holmen.com)

4.8.1 Assumptions
When analyzed Holmen we started by looking over the growth in net income from years
2001-2005, see appendix 44 for values. It is clear that the growth varies between the years
2001-2005, however between 2004-2005 there is a growth of 3,7%, and based on the for-
est industry Holmen operates on which is fairly stable we assume that they will have a sta-
ble 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 mar-
ket, and they will do so by attractive products, active marketing and product development,
further the growth shall be organic or come from selective acquisitions. Further Holmen‟s
main market is Europe and its accounts for 90 percent of the group‟s sales. In Holmen an-
nual report 2005 we can also read that they themselves realize that they operate in a rela-
tively 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 re-
port 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 calcula-
tions of 246 SEK we didn‟t took into account the extra dividend Holmen paid out the
years 2001, 2003 and 2004. (www.nasdaqomxnordic.com) Our stock price of 246 SEK with
GGM can be compared to UBS target price in 2006-02-06 of 250, only 4 SEK difference
between our future predictions of Holmens stock price.

As seen in the graph below we can see that our DDM valuation was overvalued with 11
percent and the best valuation did Credit Suisse with an overvaluation of only 6,6 percent.

Holmen
450 SEK 200,00%
400 SEK 175,00%
350 SEK 150,00%
300 SEK
125,00%
250 SEK
200 SEK 100,00%
150 SEK 75,00%
100 SEK 50,00%
50 SEK 25,00%
0 SEK 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 com-
pared to the GGM as seen in the graph above. When Handelsbanken valuate Holmens
stock price in 2006-02-06 their target price in 293 SEK, however Affärsvärldens came up
with a higher target price in 2006-01-18 of 350 SEK, which is more close to our stock price
of 483 SEK.

4.9 TeliaSonera
TeliaSonera is a public trade company that is listed on both NASDAQ OMX Stockholm
and Nasdaq OMX Helsinki. TeliaSonera is the result of the merger the of Swedish tele-
communication 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 Tur-
key, teliasonera.com.

TeliaSonera is the leading telecommunication leader in Sweden, and Telia was earlier oper-
ated 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 op-
erates 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 Rus-
sia. 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 an-
nual 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 de-
clining 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 de-
crease 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 com-
pensate for the decline in prices, we also believe that the use of mobile product will in-
crease in the future compensating for some of the price fall.

With our analysis of historical growth together with what TeliaSonera expects for the fu-
ture 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 ra-
tio 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
120%
60 SEK
50 SEK 100%
40 SEK 80%
30 SEK 60%
20 SEK 40%
10 SEK 20%
0 SEK 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 solu-
tions, 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 con-
ducted through both wholly owned and independent dealers. Volvo is today listed on the
Nasdaq OMX Stockholm AB‟s Large Cap list. (www.volvogroup.com)

54
4.10.1 Assumptions

When analyzed Volvo Group we started by looking at the growth in net income, here we
can see that there was some irregularities, with yearly growth varying from -78,6 percent in
2003 to 3039,3 percent in 2004. Because of these huge irregularities we decided to look at
operating turnover instead. This growth has been fairly stable, however between the years
2003 to 2004 the growth increase from -1,6 percent to 15,3 percent, see appendix 54. Fol-
lowed by a small decrease in growth from 15,3 percent in 2004 to 13,9percent in 2005.
Based on this data and the market Volvo operates in we assumed that Volvo Group is a
typical one stage company, with a constant stable growth rate of 2,5 percent from 2006-
2010. It‟s important to mentioned that Volvo operates in over 180 countries and therefore
its fairly hard to predict any stable future growth rate, however we feel comfortable with a
market growth of 2,5 percent since according to Damodaran (2002) this is normal for a
company as Volvo. In Volvo annual report they have as a goal to grow with an average of
10 percent annually which should be achieved with through both organic growth and ac-
quisitions. They also have an annual goal to achieve a a return on shareholder‟s equity of
12-15 percent a year, but only managed to actually achieve an average of 6,4 percent be-
tween 2001 and 2005. We believe that an average annual increase in net income of 10 per-
cent 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%
110 SEK 90%
100 SEK
80%
90 SEK
80 SEK 70%
70 SEK 60%
60 SEK 50%
50 SEK 40%
40 SEK
30%
30 SEK
20 SEK 20%
10 SEK 10%
0 SEK 0%
Actual DDM FCFE Evli Bank Deutsche Credit Kaupthing
Stock price Valuation Valuation Bank Suisse 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
5 Extended Analysis
In this part of the study an extended analysis is made where we combined all of the data in order to explain
and analyze our findings which we will later base our conclusions upon.

When analyzing the results from the valuation some interested differences between the val-
uation methods where found. FCFE valuation accounted for the 5 most overvalued predic-
tions ranging from an overvaluation of 33,5 percent to an entire 118,2 percent overvalua-
tion 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 al-
so 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 ac-
tually 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 ac-
tual valuation could differ a lot from case to case. In the table below we can also see how
the spread between the two different models differs.

Average DDM valuation -11% Average FCFE valuation 21%

Median DDM valuation -3% Median FCFE valuation 16%
Lowest DDM valuation -52% Lowest FCFE valuation -20%
Highest DDM valuation 27% Highest FCFE valuation 118%
Spread 0,784203 Spread 1,3792

Table 2, Summarize of DDM and FCFE valuations

An analyze was also made to see if there was a tendency for one or the other valuation me-
thods 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 corpora-
tions 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 compa-
nies 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 relation-
ship 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 mod-
ified 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 acquisi-
tions, investments in future growth, employee bonuses and a lot more. The theory holds
that money reinvested into the firm should be used to create more future value. If the
money that is reinvested in the firm actually is used to create more value, the company
should continue to increase as seen in chapter 2.6. However if the companies on the other
hand pay out a large part of its dividends to its shareholders it doesn‟t have a out of money
to continue growing with, this will probably lead to a decrease in future growth. This is
where DDM and FCFE differs a lot, DDM only take into account what is actually paid-out
to its shareholders in form of dividends and also future dividends. FCFE on the other hand
take into account all that is possible to be paid out as dividends from today and in the fu-
ture. 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 real-
ize 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 con-
trast, when using modified DDM to value a company you only use the dividends, stock re-
purchase 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

600 Alfa laval

Assa Abloy
500
Atlas Copco
400
Axfood
300 Boliden
200 Ericsson
100 H&M

0 Holmen
Datum

2006-05-22

2010-04-19
2006-03-09

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

2010-06-29
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
6 Conclusion
In this chapter conclusion are being drawn from the analysis in order to answer the purpose and research
questions.

Within this study we valued and compared Dividend Discount Model and Free Cash Flow
To Equity Model. 10 different companies from OMX Stockholm 30 was valued with both
models in order to get a deeper understanding of how the models function in practice and
based on that data answer our research questions.

 How will the result differ when calculating stock price for firms when using DDM compared to
FCFE?

A conclusion can be drawn from our analysis that the result differs a lot from the use of
the two different valuation models and that they work better in different situations. When
comparing DDM to FCFE we found that FCFE valuation made a higher valuation on 9
out of 10 companies in this study. Moreover FCFE valuation accounted for the 5 most
overvalued predictions ranging from an overvaluation of 33,5 percent to an entire 118,2
percent overvaluation. DDM on the other hand accounted for the 2 valuations that were
the most undervalued with an undervaluation of 51,8 percent and 46,8 percent and also for
4 out of the 5 valuations that where the lowest.

 How accurate are DDM and FCFE model when used to value different companies?

None of the two models are very accurate when it comes to valuate a specific company,
there are too many unknown parameters that can affect the result. The research results
confirm this conclusion due to the fact that the spread for both DDM and FCFE model is
large. When valuating the 10 companies with the DDM the results from an undervaluation
of 52 percent to a overvaluation of 27 percent. FCFE model on the other had an even larg-
er 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 valua-
tion price. It also shows that the DDM had a lower spread compared to the FCFE model.

60
  Is there a specific payout ratio where DDM works better than FCFE?

In the research we saw that there is a tendency for FCFE valuation to work better with
companies with a low dividend pay-out ratio and that DDM valuation works better on
companies with a high dividends pay-out ratio. However we cannot draw a conclusion
from our study that there exist an exact correlation between dividends pay-out ratio and
which model that would perform better. There are many indicators that would suggest that
DDM performs better when valuating firms with higher pay-out ration. In contrast FCFE
model works better when valuating companies with lower pay-out ratio. On the other hand
we cannot see that there is an exact ratio that works as a cut-off point for when you should
use DDM and when you should use FCFE model to get the most accurate valuation.

61
7 Discussion and Reflections
Even though we are happy with the results that are shown, this is a very limited research
that is made. This research is limited to only the Swedish stock market and even to OMX
Stockholm 30, which only includes the largest 30 companies in Sweden. Out of the 30
companies 10 is picked for this research. Also the data that was collected was only collected
between the years of 2001 and 2005 to use for the company valuations. If we would have
had more time and resources this research could have been expanded to a larger sample in
Sweden with shares from all lists in Sweden if we would have wanted to concentrate on the
Swedish market or it could even be expanded to have large sample of shares from all the
world‟s stock markets to show how it works in a larger picture. Following if we would have
had more time and resources it would have been a good idea to also use maybe 10 years of
information back in time from for example from 2001 to 2010 and then to value 5 or 10
years ahead of time to see the result, this would not work as a master research paper but
for a doctorial study it might be a good alternative since you would not have it biased from
knowing how a company have performed during the years.

7.1 Future Studies

It would have been interesting to do interviews with market professionals, the results might
have been less biased. Also the decision of selecting 10 companies can be seen as a disad-
vantage since it is a fairly low amount of companies and therefore the results might be bi-
ased, so for future studies it would be wise to include more than 10 companies when con-
ducting this kind of study.

62
8 References

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Graham, B., D. L. Dodd, and S. Cottle. (1962). Security Analysis. New York, NY:
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Lee, C.M, Myers, J. and Swaminathan, B. (1999), “What is the Intrinsic Value of the
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Ou, J. A. (1990). “The Information Content of Nonearnings Accounting Numbers as

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Ou, J. A., and S. H. Penman. (1989). “Financial Statement Analysis and the Prediction of
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Pålsson Syll, L., 2001. Ekonomisk teori och metod. Lund: studentlitteratur.
Ross, Westerfield and Jaffe (2008) Corporate Finance, 8th edition
Saunders, M., Lewis, P., & Thornhill, A., 2007. Research Methods for Business Students. Pearson
Education Limited, Edinburgh.

Thurén, T. Vetenskapsteori för nybörjare. Stockholm, Liber AB, 1998

Internet Sources
Atlas copco 2011 a
http://www.atlascopco.us/usus/AtlasCopcogroup/ACinsummary/Factsandfigures/index.
aspx

Atlas copco 2011 b

http://www.atlascopco.us/usus/AtlasCopcogroup/History/

Ericsson 2011 a
http://www.ericsson.com/thecompany/company_facts/history
2011-05-01

Ericsson 2011 b
http://www.ericsson.com/thecompany/company_facts.
2011-05-01
HM 2011

64
http://www.hm.com/se/omhm/faktaomhm__facts.nhtml
2011-05-02

TeliaSonera 2011
http://teliasonera.com/en/About-TeliaSonera/TeliaSonera-Group/Our-history/
2011-05-07

Alfa Laval 2011

http://local.alfalaval.com/en-us/about-us/Pages/default.aspx
2011-05-09

www.di.se
http://www.nasdaqomxnordic.com/nordic/Nordic.aspx
www.riksbanken.se

Theses

Absiye, K. & Diking, J. (2001) ”Värdering av Unga Tillväxtbolag – Risker,

Värderingsmodeller och Värdegrundande Egenskaper”, Unpublished Master
Thesis, Kostnads- och intäktsanalys, Handelshögskolan vid Göteborgs
Universitet

Carlsson, M. & Dahlström, H.(2000) Company Valuation; a Case Study of Sandvik:

Cash is King, Unpublished Bachelor‟s Thesis, Handelshögskolan vid
universitetet I Göteborg

Eixmann, L. & Österberg, J. (2000) Företagsvärdering med hjälp av Substansvärde,

Kassaflöden och CAPM; en jämförelse av Modellernas Olika Egenskaper,
Unpublished Master Thesis, Handelshögskolan vid Universitetet i Göteborg

Olsson, O.K, Ribbing, J & Werner, M (2002) The Discounted Cash Flow Approach To Firm
Valuation, A study with focus on forecasting. Master Thesis, Göteborg University

Flöstrand, P. 2006. Valuation Relevance. The use of Information and Choice of Method in
Equity Valuation

Olsson, F & Persson, M. (2009) Business Valuation, How to value private limited knowledge based
companies. Published Master Thesis in Finance, Jönköping International Business School

Annual Reports

Alfa Laval Annual Report 2001

Alfa Laval Annual Report 2002

65
Alfa Laval Annual Report 2003
Alfa Laval Annual Report 2004
Alfa Laval Annual Report 2005
Alfa Laval Annual Report 2010

Assa Abloy Annual Report 2001

Assa Abloy Annual Report 2002
Assa Abloy Annual Report 2003
Assa Abloy Annual Report 2004
Assa Abloy Annual Report 2005

Atlas Copco Annual Report 2001

Atlas Copco Annual Report 2002
Atlas Copco Annual Report 2003
Atlas Copco Annual Report 2004
Atlas Copco Annual Report 2005
Atlas Copco Annual Report 2010

Axfood Annual Report 2001

Axfood Annual Report 2002
Axfood Annual Report 2003
Axfood Annual Report 2004
Axfood Annual Report 2005

Boliden Annual Report 2001

Boliden Annual Report 2002
Boliden Annual Report 2003
Boliden Annual Report 2004
Boliden Annual Report 2005

Ericsson Annual Report 2001

Ericsson Annual Report 2002
Ericsson Annual Report 2003
Ericsson Annual Report 2004
Ericsson Annual Report 2005
Ericsson Annual Report 2010

H&M Annual Report 2001

H&M Annual Report 2002
H&M Annual Report 2003
H&M Annual Report 2004
H&M Annual Report 2005
H&M Annual Report 2010

Holmen Annual Report 2001

Holmen Annual Report 2002
Holmen Annual Report 2003
Holmen Annual Report 2004
Holmen Annual Report 2005

66
TeliaSonera Annual Report 2001
TeliaSonera Annual Report 2002
TeliaSonera Annual Report 2003
TeliaSonera Annual Report 2004
TeliaSonera Annual Report 2005

Volvo Annual Report 2001

Volvo Annual Report 2002
Volvo Annual Report 2003
Volvo Annual Report 2004
Volvo Annual Report 2005
Volvo Annual Report 2010

67
Appendices
Appendix 1

Alfa Laval
Profit & loss account
Consolidated 31/12/2001 31/12/2002 31/12/2003 31/12/2004 31/12/2005
th SEK th SEK th SEK th SEK th SEK
12 months 12 months 12 months 12 months 12 months
Local GAAP Local GAAP Local GAAP Local GAAP Local GAAP
Operating revenue (Turnover) 16218700 14864000 14151700 15311000 16 602 500
Sales 15829600 14595000 13909300 14985800 16 330 400
Costs of goods sold 10348000 9450000 8976300 9937000 10 800 400
Gross profit 5870700 5414000 5175400 5374000 5 530 000
Other operating expenses 4639200 4194000 4036900 4127100 4 424 900
Operating P/L [=EBIT] n.a. 1220000 1138500 1246900 1 377 200
Financial revenue 247500 360000 274400 169500 178 500
Financial expenses 1437200 902000 595500 346300 368 200
Financial P/L -1189700 -542000 -321100 -176800 -189 700
P/L before tax n.a. 372000 817400 1070100 1 099 000
Taxation -26300 218000 130000 421500 171 000
P/L after tax 26300 154000 687400 648600 928 000
Extr. and other revenue n.a. n.a. n.a. n.a. 0
Extr. and other expenses n.a. n.a. n.a. n.a. 0
Extr. and other P/L n.a. -34000 -41600 -45400 0
P/L for period [=Net income] n.a. 120000 645800 603200 928 000

Appendix 2

Alfa Laval Growth Rate

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

68
 Appendix 3
Alfa Laval important data
Year end 2000 2001 2002 2003 2004 2005

Total assets 18602000 17631800 15427000 14689500 13901000 16206400

Shareholders equity
Cash
Short-term debt 5083000 4751600 3873000 3733500 4010300 5716500
Long-term debt 12200000 11303100 6933000 5954800 4804500 4678500

Debt to total assets 0,93 0,91 0,70 0,66 0,63 0,64

Capital Expenditure 258100 3043900 380200 85000 725200

Depreciation 315000 912200 811000 787200 745800 579500

Change in WC -196600 -773400 312800 -238300 -428000

WC 3986000 3789400 3016000 3328800 3090500 2662500

No. Of Shares 37 496 325 85 482 322 111 671 992 111 671 993 111 671 993

EPS (year end) 1,404 5,783 5,402 8,310

EPS (average)

Shareholders Dividend 223 300 000 446 700 000 530 400 000
Suggested DPS
DPS 0 1,999606132 4,000107708 4,749624196

New issue 3 136 600 000

Deduction
Fusioner
Share repurchase

Payout ratio 0,35 0,74 0,57

69
 Appendix 4
Alfa Laval Two-stage DDM
Riskfree rate 3,37%
Market Risk premium 5,50%
Beta stable Growth 1,0623
Beta High Growth 1,0623
Cost of equity stable growth 9,21%
Cost of equity high growth 9,21%
Expected growth rate stable growth 2,50%
Expected growth rate high growth 12,0%
RoE stable growth
Payout ratio Stable growth 0,9

High Growth Stage Expected Growth EPS Payoutratio

DPS Cost of Equity Present Value
1 12,0% 9,31 0,57 5,319579 9,21%
2 12,0% 10,42 0,57 5,957929 9,21%
3 12,0% 11,68 0,57 6,67288 9,21%
4 12,0% 13,08 0,57 7,473626 9,21%
5 12,0% 14,65 0,57 8,370461 9,21%
6 12,0% 16,40 0,57 9,374916 9,21% 8,584093495
7 12,0% 18,37 0,57 10,49991 9,21% 8,803178675
8 12,0% 20,58 0,57 11,75989 9,21% 9,027855395
9 12,0% 23,04 0,57 13,17108 9,21% 9,258266367
10 12,0% 25,81 0,57 14,75161 9,21% 9,494557939

Terminal value 228,29

Value 273,46
Spit 4:1 68,37 Alfa laval made a stock split 4:1

70
 Appendix 5
Alfa Laval Two-stage FCFE
High Growth Net income Capital Expenditures Depreciation Change in WC Debt ratio FCFE
FCFE 2001 n.a. 258 100 912200 -196600 0,91
FCFE 2002 120000 3 043 900 811000 -773400 0,70 -317178
FCFE 2003 645800 380 200 787200 312800 0,66 677871
FCFE 2004 603200 85 000 745800 -238300 0,63 932169
FCFE 2005 928 000 725 200 579500 -428000 0,64 1029229

Future Predictions
Expected growth Cost of Equity
2006 12,0% 9,21%
2007 12,0% 9,21%
2008 12,0% 9,21%
2009 12,0% 9,21%
2010 12,0% 9,21%
2011 12,0% 9,21%
2012 12,0% 9,21%
2013 12,0% 9,21%
2014 12,0% 9,21%
2015 12,0% 9,21%

Future Growth in FCFE Discounted FCFE

FCFE 2006 1152737
FCFE 2007 1291065
FCFE 2008 1445993
FCFE 2009 1619512
FCFE 2010 1813853
FCFE 2011 2031516 1860147
FCFE 2012 2275297 1907622
FCFE 2013 2548333 1956309
FCFE 2014 2854133 2006238
FCFE 2015 3196629 2057442

Terminal Value 48811496 31416470

Stock Price 369

Split 4:1 92,24

Appendix 6
Date Company Target Price
2005-12-14 Credit Suisse 165 kr
2006-01-13 Lehman Brothers 180 kr
2006-01-16 Handelsbanken Capital markets 190 kr
2006-02-10 Danske Markets Equities 206 kr
2006-03-06 Handelsbanken Capital markets 230 kr

71
 Appendix 7
Assa Abloy
Profit & loss account
Consolidated 30/11/2001 30/11/2002 30/11/2003 30/11/2004 30/11/2005
th SEK th SEK th SEK th SEK th SEK
12 months 12 months 12 months 12 months 12 months
Local GAAP Local GAAP Local GAAP Local GAAP Local GAAP

Operating revenue (Turnover) 22656700 25515800 24260000 25707000 27838000

Sales 22510000 25396900 24080000 25526000 27802000
Costs of goods sold 13863100 15525900 14613000 15148000 16508000
Gross profit 8793600 9989900 9647000 10559000 11294000
Other operating expenses 6660800 7352000 8574000 7789000 7252000
Operating P/L [=EBIT] 2132800 2637900 1073000 2770000 4078000
Financial revenue 2793900 237700 231000 194000 51000
Financial expenses 3451100 860600 721000 670000 573000
Financial P/L -657200 -622900 -490000 -476000 -522000
P/L before tax 1475600 2015000 583000 2294000 3556000
Taxation 507400 689100 556000 792000 943000
P/L after tax 968200 1325900 27000 1502000 2613000
Extr. and other revenue n.a. n.a. n.a. n.a. 0
Extr. and other expenses n.a. n.a. n.a. n.a. 0
Extr. and other P/L -19600 -56000 -18000 -7000 0
P/L for period [=Net income] 948600 1269900 9000 1495000 2613000

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 2000 2001 2002 2003 2004 2005

Total assets 26097200 34669000 33260600 29827000 29322000 33692000

Shareholders equity
Cash
Short-term debt 5594600 8763100 9785900 8198000 10185000 13522000
Long-term debt 9215500 13578600 10762600 10935000 8662000 5757000

Debt to total assets 0,57 0,64 0,62 0,64 0,64 0,57

Capital Expenditure 1 040 200 384 800 -2 018 100 -219 000 3 938 000

Depreciation 1721100 1907100 1856000 1872000 882000

Change in WC -1061500 -1593900 404100 -1789000 -2028000

wc 2901300 1839800 245900 650000 -1139000 -3 167 000

No. Of Shares 356 730 000 361 730 000 370 935 000 370 935 000 378 718 000 378 718 000

EPS (year end) 2,62 3,42 0,02 3,95 6,90

EPS (average)

Shareholders Dividend 325 557 000 370 935 000 463 668 750 473 397 500 984 666 800
Suggested DPS
DPS 0,9 1 1,25 1,25 2,6

New issue
Deduction
Fusioner
Share repurchase

Payout ratio 0,34 0,29 51,52 0,32 0,38

73
 Appendix 10
Assa Abloy two-stage DDM
Riskfree rate 3,37%
Market Risk premium 5,50%
Beta stable Growth 0,8927
Beta High Growth 0,8927
Cost of equity stable growth 8,28%
Cost of equity high growth 8,28%
Expected growth rate stable growth 2,50%
Expected growth rate high growth 8,3%
RoE stable growth
Payout ratio Stable growth 0,75

High Growth Stage Expected Growth EPS Payoutratio

DPS Cost of Equity
1 8,3% 7,47 0,33 2,482013 0,06552
2 8,3% 8,09 0,33 2,687762 0,06552
3 8,3% 8,76 0,33 2,910565 0,06552
4 8,3% 9,49 0,33 3,151839 0,06552
5 8,3% 10,27 0,33 3,413113 0,06552

Terminal value 136,65

Stock price 136,65

Appendix 11
Assa Abloy two-stage FCFE
High Growth Net income Capital Expenditures Depreciation Change in WC Debt ratio FCFE
FCFE 2001 948600 1 040 200 1721100 -1061500 0,64 1568147
FCFE 2002 1269900 384 800 1907100 -1593900 0,62 2460902
FCFE 2003 9000 -2 018 100 1856000 404100 0,64 1253114
FCFE 2004 1495000 -219 000 1872000 -1789000 0,64 2881092
FCFE 2005 2613000 3 938 000 882000 -2028000 0,57 2173235

Future Predictions
Expected growth Cost of Equity
2006 8,3% 8,28%
2007 8,3% 8,28%
2008 8,3% 8,28%
2009 8,3% 8,28%
2010 8,3% 8,28%

Future Growth in FCFE Discounted FCFE

FCFE 2006 2353387
FCFE 2007 2548472
FCFE 2008 2759730
FCFE 2009 2988500
FCFE 2010 3236233

Terminal Value 57391443 53002884

Stock Price 140

74
 Appendix 12
Date Company Target price
2005-11-02 SEB Enskilda 144 kr
2005-11-18 Credit Suisse 110 kr
2006-02-10 Morgan Stanley 112 kr
2006-02-13 Lehman Brothers 125 kr
2006-02-13 Danske Bank 140-150 kr
2006-02-15 Handelsbanken Capital Markets 134 kr

Appendix 13
Atlas Copco
Profit & loss account
Consolidated 30/11/2001 30/11/2002 30/11/2003 30/11/2004 30/11/2005
th SEK th SEK th SEK th SEK th SEK
12 months 12 months 12 months 12 months 12 months
Local GAAP Local GAAP Local GAAP Local GAAP Local GAAP

Operating revenue (Turnover) 51340000 47773000 44842000 48817000 52975000

Sales 51139000 47562000 44619000 48654000 52742000
Costs of goods sold 35134000 32803000 30640000 32837000 33971000
Gross profit 16206000 14970000 14202000 15817000 18771000
Other operating expenses 10076000 16659000 8892000 9280000 9601000
Operating P/L [=EBIT] 6130000 -1689000 5310000 6700000 9403000
Financial revenue 164000 311000 n.a. 495000 577000
Financial expenses 1594000 1091000 397000 601000 680000
Financial P/L -1430000 -780000 -397000 -106000 -103000
P/L before tax 4700000 -2469000 4913000 6380000 9300000
Taxation 1622000 1361000 1619000 2112000 2936000
P/L after tax 3078000 -3830000 3294000 4268000 6364000
Extr. and other revenue n.a. n.a. n.a. 0 0
Extr. and other expenses n.a. n.a. n.a. 0 0
Extr. and other P/L -11000 -59000 -20000 0 0
P/L for period [=Net income] 3067000 -3889000 3274000 4254000 6581000

Appendix 14

Atlas Copco Growth Rate

2 001 2 002 2 003 2 004 2 005
Operating revenue (Turnover) 51 340 000 47 773 000 44 842 000 48 817 000 52 975 000
% -7% -6% 8,9% 8,5%
Sales 51 139 000 47 562 000 44 619 000 48 654 000 52 742 000
% -7% -6% 9,0% 8%
Net Income 3 067 000 -3 889 000 3 274 000 4 254 000 6 581 000
% -227% -184% 30% 55%

75
 Appendix 15
Atlas Copco
Year end 2000 2001 2002 2003 2004 2005

Total assets 61688000 64357000 48668000 45862000 47222000 54955000

Shareholders equity
Cash
Short-term debt 19359000 18032000 10811000 11679000 11295000 15699000
Long-term debt 18128000 18536000 17503000 13115000 13595000 13448000

Debt to total assets 0,61 0,57 0,58 0,54 0,53 0,53

Capital Expenditure 3 588 000 -7 435 000 714 000 1 264 000 3 476 000

Depreciation 4556000 683276 85000 688000 3320000

Change in WC 1623000 5978000 1158000 1538000 -705000

wc -720000 903000 6881000 8039000 9577000 8872000

No. Of Shares 209 602 184 209 602 184 209 602 184 209 602 184 628 806 553

EPS (year end) 14,63 -18,55 15,62 20,30 10,47

EPS (average)

Shareholders Dividend 1 125 000 000 1 165 000 000 1 219 000 000 1 575 000 000 1 890 000 000
Suggested DPS
DPS 5,37 5,56 5,82 7,51 3,01

New issue
Deduction
Fusioner
Shrae repurchase 4192000000

Payout ratio 0,37 -0,30 0,37 0,37 0,29

76
 Appendix 16
Atlas Copco Two-stage DDM
Riskfree rate 3,37%
Market Risk premium 5,50%
Beta stable Growth 1,0532
Beta High Growth 1,266
Cost of equity stable growth 9,16%
Cost of equity high growth 10,33%
Expected growth rate stable growth 2,50%
Expected growth rate high growth 9,0%
RoE stable growth
Payout ratio Stable growth 0,9

High Growth Stage Expected Growth EPS Payoutratio

DPS Cost of Equity
1 9,0% 11,41 0,34 3,915751 10,33%
2 9,0% 12,43 0,34 4,268169 10,33%
3 9,0% 13,55 0,34 4,652304 10,33%
4 9,0% 14,77 0,34 5,071011 10,33%
5 9,0% 16,10 0,34 5,527402 10,33%
6 9,0% 17,55 0,34 6,024868 10,33%
7 9,0% 19,13 0,34 6,567107 10,33%
8 9,0% 20,85 0,34 7,158146 10,33%
9 9,0% 22,73 0,34 7,802379 10,33%
10 9,0% 24,78 0,34 8,504594 10,33%

Terminal value 209,81

Stock price 236,47
Spit 2:1 118,23 In 2007 Atlas Copco made a stock split 2:1

77
 Appendix 17
Atlas Copco Two-stage FCFE
High Growth Net income Capital Expenditures Depreciation Change in WC Debt ratio FCFE
FCFE 2001 3067000 3 588 000 4556000 1623000 0,57 2784175
FCFE 2002 -3889000 -7 435 000 683276 5978000 0,58 -2993891
FCFE 2003 3274000 714 000 85000 1158000 0,54 2453091
FCFE 2004 4254000 1 264 000 688000 1538000 0,53 3254257
FCFE 2005 6581000 3 476 000 3320000 -705000 0,53 6838822

Future Predictions
Expected growth Cost of Equity
2006 9,0% 10,33%
2007 9,0% 10,33%
2008 9,0% 10,33%
2009 9,0% 10,33%
2010 9,0% 10,33%
2011 9,0% 10,33%
2012 9,0% 10,33%
2013 9,0% 10,33%
2014 9,0% 10,33%
2015 9,0% 10,33%

Future Growth in FCFE Discounted FCFE

FCFE 2006 7454316
FCFE 2007 8125204
FCFE 2008 8856472
FCFE 2009 9653555
FCFE 2010 10522375
FCFE 2011 11469389 10395248
FCFE 2012 12501634 11330820
FCFE 2013 13626781 12350594
FCFE 2014 14853191 13462147
FCFE 2015 16189978 14673740

Terminal Value 249072848 148619360

Stock Price 335

Split 2:1 167,64

Appendix 18
Date Company Target price
2005-12-05 Morgan Stanley 155 kr
2006-01-13 Lehman Brothers 200 kr
2006-02-03 Lehman Brothers 215 kr
2006-02-03 Bear Stearns 230 kr

78
 Appendix 19

Axfood
Amounts in SEK m 2001 2002 2003 2004 2005
Net sales 32428 33115 33616 33826 28 086
Cost of goods sold -28425 -28612 -29721 -29748 -24172
Gross profit 4003 4503 3895 4078 3914
Selling expenses -2331 -2472 -2015 -2056 -1879
Administrative expenses -1140 -1215 -1144 -1187 -1158
Share of profit in associated companies 21 32 10 3 4
Other operating income 179 175 302 195 193
Other operating expenses -14 -25 -21
Operating profit 653 1023 1034 1008 1040
Interest income and similar profit/loss items 15 20 16 18 11
Interest expense and similar profit/loss items -141 -124 -79 -46 -25
Net financial items -126 -104 -63 -28 -14
Profit before tax 527 919 971 980 1026
Current tax -144 -242 -215 -254 -576
Deferred tax -38 -44 -60 -58 279
Net profit for the year 328 625 684 664 729

Appendix 20
Axfood Growth rate
2001 2002 2003 2004 2005

Net Sales 32428 33115 33616 33826 28086

7,27% 2,12% 1,51% 0,62% -16,97%
EBIT 653 1023 1034 1008 1040
483,04% 56,66% 1,08% -2,51% 3,17%
EBT 527 919 971 980 1026
#DIVISION/0! 74,38% 5,66% 0,93% 4,69%
Net income 328 625 684 664 729
-1064,71% 90,55% 9,44% -2,92% 9,79%

79
 Appendix 21

Axfood important data

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

Debt to total assets 0,79 0,75 0,66 0,55 0,52 0,51

Capital Expenditure 374 559 637 299 257

Depreciation 518 496 552 599 467

Change in WC -138 540 492 449 737

No. Of Shares 53229028 53229028 53 497 028 53 577 828 54 531 378

EPS (year end) 6,16 11,74 12,79 12,39 13,37

EPS (average) 6,16 11,74 12,82 12,40 13,49

Shareholders Dividend 10 133 266 295 590

Suggested DPS 2.50 5 5.50 5.50 15
DPS 0,188 2,499 4,972 5,506 10,819

New issue 10 0 20 6 70
Deduction 0 0 0 0 0
Fusioner 0 0 12 0 0
Share repurchase 0 0 0 0 0

Payout ration 3,05% 21,28% 38,79% 44,39% 80,23%

80
 Appendix 22
Axfood Three-stage DDM

Riskfree rate assumed by Axfood 0,04

Riskfree rate (kvartal 4 2005) 0,03312
AA rating premium 0,01
Risk of
Market Risk premium high growth 0,054
Market Risk premium stable growth 0,054
Beta 0,6
Cost of equity high growth 0,06552
Cost of equity stable growth 0,06552

Expected growth rate high growth 0,1

Expected growth rate Stable growth 0,025
RoE stable growth 0,12
Payout ratio Stable growth 0,791666667

Three stage dividend discount model

High Growth Stage Expected GrowthEPS 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 Terminal Price

10 475,4296307 252,040415
Stock Price 282,4

81
 Appendix 23
Axfood Three-stage FCFE
Net income Capital Expenditures Depreciation Change in WC Debt ratio FCFE
FCFE 2001 328 374 518 -138 0,75 398,9447663
FCFE 2002 625 559 496 540 0,66 418,971584
FCFE 2003 684 637 552 492 0,55 423,4940519
FCFE 2004 664 299 599 449 0,52 592,8225762
FCFE 2005 729 257 467 737 0,51 470,9656494

Future predictions
High Growth Stage Expected Growth EPS Payoutratio DPS Cost of Equity Present Value
1 10,00% 12,42 0,46 8,54 6,55% 7,96
2 10,00% 13,66 0,46 9,14 6,55% 7,95
3 10,00% 15,03 0,46 9,78 6,55% 7,93
4 10,00% 16,53 0,46 10,46 6,55% 7,91
5 10,00% 18,18 0,46 11,19 6,55% 7,89
Transition Stage -
6 8,50% 19,73 0,58 11,88 6,55% 7,81
7 7,00% 21,11 0,63 12,50 6,55% 7,66
8 5,50% 22,27 0,69 13,03 6,55% 7,45
9 4,00% 23,16 0,74 13,48 6,55% 7,18
10 2,50% 23,74 0,79 13,81 6,55% 6,87

Stable Growth Terminal Price

11 448,87

Future Growth in FCFE Discounted FCFE

FCFE 2006 507,14

FCFE 2007 557,86
FCFE 2008 613,64
FCFE 2009 675,01
FCFE 2010 742,51
FCFE 2011 742,51 696,85
FCFE 2012 805,62 709,59
FCFE 2013 862,02 712,57
FCFE 2014 909,43 705,54
FCFE 2015 945,80 688,64
Terminal value 969,45 14796,23

Sum of PV FCFE 18309,43

Value of stock 335,76

Appendix 24
Date Company Target Price
2005-12-02 HQ Bank 240 kr
2006-02-06 Öhman 215 kr
2006-02-06 Handelsbanken Capital Markets 180 kr

82
 Appendix 25
Boliden
Profit & loss account 31/12/2001 31/12/2002 31/12/2003 31/12/2004 31/12/2005
Consolidated th SEK th SEK th SEK th SEK th SEK
12 months 12 months 12 months 12 months 12 months
Local GAAP Local GAAP Local GAAP Local GAAP Local GAAP
Operating revenue (Turnover) 10302000 9675000 9651000 18341000 20563000
Sales 10250000 9556000 9545000 17928000 20441000
Costs of goods sold 9686000 8569000 8507000 15563000 16486000
Gross profit 616000 1106000 1144000 2778000 3955000
Other operating expenses 1565000 692000 1163000 1112000 1008000
Operating P/L [=EBIT] -949000 414000 -19000 1666000 3069000
Financial revenue 50000 48000 69000 35000 26000
Financial expenses 2857000 351000 301000 501000 283000
Financial P/L -2807000 -303000 -232000 -466000 -257000
P/L before tax -3756000 111000 -251000 1200000 2812000
Taxation -562000 -20000 -265000 145000 766000
P/L after tax -3194000 131000 14000 1055000 2046000
Extr. and other revenue n.a. n.a. n.a. n.a. 0
Extr. and other expenses n.a. n.a. n.a. n.a. 0
Extr. and other P/L 957000 1000 -1000 0 0
P/L for period [=Net income] -2237000 132000 13000 1055000 2046000

Appendix 26

Boliden
2001 2002 2003 2004 2005
Operating revenue (Turnover) 10302000 9675000 9651000 18341000 20563000
% -6,09% -0,248% 90,04% 12,11%

Sales 10250000 9556000 9545000 17928000 20441000

% -6,77% -0,12% 87,83% 14,02%
P/L for period [=Net income] -2237000 132000 13000 1055000 2046000
% 106% -90,15% 8015,38% 93,93%

83
 Appendix 27

Boliden
Year end 2000 2001 2002 2003 2004 2005

Total assets 12 057 000 11 176 000 10 694 000 19 861 000 20 017 000 22 918 000

Shareholders equity
Cash
Short-term debt 3 539 000 7 453 000 2 038 000 3 906 000 2 905 000 5 848 000

Long-term debt 8 432 000 1 195 000 6 065 000 9 855 000 8 153 000 6 781 000

Debt to total assets 0,99287 0,77380 0,75771 0,69287 0,55243 0,55105

Capital Expenditure 2 442 000 63 000 3 509 000 2 859 000 1 330 000

Depreciation 986 000 837 000 519 000 652 000 1 311 000 1 229 000

Change in WC -4 303 000 5 050 000 421 000 914 000 -548 000
Working Capital -38 000 -4 341 000 709 000 1 130 000 2 044 000 1 496 000

No. Of Shares 85811638 85811638 168258113 289387169 289387169

EPS (year end) -26,06873 1,5382529 0,07726225 3,64563503 7,07011305

EPS (average)

Shareholders Dividend 0 0 0 0 578774338

Suggested DPS
DPS 0 0 0 0 2

New issue
Deduction
Fusioner
Share repurchase

Payout ratio 0,28

84
 Appendix 28

Boliden Two Stage-DDM

Riskfree rate 3,37%
Market Risk premium 0,055
Beta stable growth 1,29913
Beta high growth 1,9971
Cost of equity stable growth 10,52%
Cost of equity high growth 14,35%
Expected growth rate Stable growth 2,5%
Expected growth rate high growth 19,1%
RoE stable growth
Payout ratio Stable growth 0,8

Dividned 2005
DPS 2005
DPs 2010

High Growth Stage Expected Growth EPS Payoutratio DPS Cost of Equity Present Value
1 19,1% 8,42 0,28 2,38 0,1435 5,458895
2 19,1% 10,02 0,28 2,84 0,1435
3 19,1% 11,94 0,28 3,38 0,1435
4 19,1% 14,21 0,28 4,02 0,1435
5 19,1% 16,93 0,28 4,79 0,1435

Terminal value 173,16

85
 Appendix 29
Boliden Two-Stage FCFE
High Growth Net income Capital Expenditures Depreciation Change in WC Debt ratio FCFE
FCFE 2001 -2237000 2 442 000 837000 -4303000 0,77 -1626715
FCFE 2002 132000 63 000 519000 5050000 0,76 -981059
FCFE 2003 13000 3 509 000 652000 421000 0,69 -993787
FCFE 2004 1055000 2 859 000 1311000 914000 0,55 -46916
FCFE 2005 2046000 1 330 000 1229000 -548000 0,55 2246680

Future Predictions
Expected growth Cost of Equity
2006 19,1% 14,35%
2007 19,1% 14,35%
2008 19,1% 14,35%
2009 19,1% 14,35%
2010 19,1% 14,35%

Future Growth in FCFE Discounted FCFE

FCFE 2006 2675252
FCFE 2007 3185579
FCFE 2008 3793254
FCFE 2009 4516848
FCFE 2010 5378473

Terminal Value 68780872 62236564 Calculated with a stable growth of 2,5%

Stock Price 215

Appendix 30
Date Company Target Price
2005-11-18 SEB Enskilda 53 kr
2005-12-15 Kaupthing Bank 65 kr
2006-01-03 UBS 75 kr
2006-01-26 Kaupthing Bank 120 kr
2006-01-31 UBS 140 kr
2006-02-08 Handelsbanken Capital Markets 116 kr

86
 Appendix 31

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

Appendix 32

Ericsson Growth rate

2 001 2 002 2 003 2 004 2 005
Operating revenue (Turnover) 240 046 000 149 746 000 119 279 000 136 907 000 156 707 000
-37,6% -20,3% 14,8% 14,5%
Sales 231 839 000 145 773 000 117 738 000 131 972 000 151 821 000
-37,1% -19,2% 12,1% 15,0%
Net Income -21 264 000 -19 013 000 -10 844 000 19 024 000 24 460 000
10,6% 43,0% 275,4% 28,6%

87
 Appendix 33
Ericsson important data
Year end 2 000 2 001 2 002 2 003 2 004 2 005

Total assets 250 314 000 250 056 000 208 267 000 182 372 000 183 040 000 208 829 000
Shareholders equity
Cash
Short-term debt 105 920 000 91 632 000 62 771 000 53 752 000 45 705 000 81 957 000
Long-term debt 49 944 000 86 305 000 69 420 000 65 840 000 58 979 000 21 345 000

Debt to total assets 0,62 0,71 0,63 0,66 0,57 0,49

Capital Expenditure -22 331 000 3 957 000 -13 296 000 15 576 000 27 171 000

Depreciation 9 781 000 7 149 000 6 531 000 4 740 000 6 073 000

Change in WC 9 834 000 -23 825 000 -3 894 000 15 178 000 -14 985 000
Noncash WC 93 888 000 103 722 000 79 897 000 76 003 000 91 181 000 76 196 000

No. Of Shares 7 909 000 000 15 820 000 000 16 132 258 678 16 132 258 678 16 132 258 678

EPS (year end) -2,6886 -1,2018 -0,6722 1,1793 1,5162

EPS (average)

4 296 000 000 -28 297 000 000 198 000 000 277 000 000 4 016 000 000
Shareholders Dividend 4 295 000 000 645 000 000 206 000 000 292 000 000 4 133 000 000
Suggested DPS
DPS 0,543 0,041 0,013 0,018 0,256
31% 142% 1415%
New issue 155 000 000 28 940 000 000 158 000 000 0 0
Deduction
Fusioner
Share repurchase 156 000 000 -2 000 000 150 000 000 -15 000 000 -117 000 000

Payout ratio -0,20 -0,03 -0,02 0,02 0,17

88
 Appendix 34

Ericsson Two-stage DDM

Riskfree rate 3,37%
Market Risk premium 5,50%
Beta stable Growth 0,7979
Beta High Growth 0,7979
Cost of equity stable growth 7,76%
Cost of equity high growth 7,76%
Expected growth rate stable growth 2,50%
Expected growth rate high growth 2,5%
RoE stable growth
Payout ratio Stable growth 0,5

High Growth Stage Expected Growth EPS PayoutratioDPS Cost of Equity

1 2,5% 1,55 0,17 0,26259962 0,06552
2 2,5% 1,59 0,17 0,269164611 0,06552
3 2,5% 1,63 0,17 0,275893726 0,06552
4 2,5% 1,67 0,17 0,282791069 0,06552
5 2,5% 1,72 0,17 0,289860846 0,06552

Terminal value 16,72

Reverse spit 1:5 83,60 In june 2010 Ericsson made a reverse stock split 1:5

89
 Appendix 35

Ericsson Two-stage FCFE

High Growth Net income Capital Expenditures Depreciation Change in WC Debt ratio FCFE
FCFE 2001 -21 264 000 -22 331 000 9 781 000 9 834 000 0,71 -14838771
FCFE 2002 -19 013 000 3 957 000 7 149 000 -23 825 000 0,63 -9144200
FCFE 2003 -10 844 000 -13 296 000 6 531 000 -3 894 000 0,66 -2678249
FCFE 2004 19 024 000 15 576 000 4 740 000 15 178 000 0,57 7887893
FCFE 2005 24 460 000 27 171 000 6 073 000 -14 985 000 0,49 21370934

Future Predictions
Expected growth Cost of Equity
2006 2,5% 7,76%
2007 2,5% 7,76%
2008 2,5% 7,76%
2009 2,5% 7,76%
2010 2,5% 7,76%

Future Growth in FCFE Discounted FCFE

FCFE 2006 21905207
FCFE 2007 22452838
FCFE 2008 23014159
FCFE 2009 23589513
FCFE 2010 24179250

Terminal Value 471312489 437378682

Stock Price 27
Reverse split 1:5 135,56

Appendix 36
Date Company Target price
2005-11-14 Handelsbanken Capital Markets 30 kr
2005-12-30 Evli Bank 35 kr
2006-01-12 Deutsche Bank 25 kr
2006-01-17 Kauping Bank 36 kr
2006-02-01 SG Equity Research 24 kr
2006-02-01 Morgan Stanley 32 kr

90
 Appendix 37

H&M
Profit & loss account
Consolidated 30/11/2001 30/11/2002 30/11/2003 30/11/2004 30/11/2005
th SEK th SEK th SEK th SEK th SEK
12 months 12 months 12 months 12 months 12 months
Local GAAP Local GAAP Local GAAP Local GAAP Local GAAP

Operating revenue (Turnover) 39 698 800 45 522 300 48 237 700 53 695 000 61 262 200

Sales 39 698 800 45 522 300 48 237 700 53 695 000 61 262 200

Costs of goods sold n.a. n.a. n.a. n.a. 25 080 700

Gross profit n.a. n.a. n.a. n.a. 36 181 500

Other operating expenses n.a. n.a. n.a. n.a. 23 008 600

Operating P/L [=EBIT] 5 477 800 8 259 100 9 223 000 10 667 300 13 172 900

Financial revenue 275 100 383 000 388 500 341 200 384 200

Financial expenses 18 900 13 200 2 800 3 200 4 300

Financial P/L 256 200 369 800 385 700 338 000 379 900

P/L before tax 5 734 000 8 628 900 9 608 700 11 005 300 13 552 800

Taxation 1 917 600 2 942 100 3 222 800 3 730 500 4 306 300

P/L after tax 3 816 400 5 686 800 6 385 900 7 274 800 9 246 500

Extr. and other revenue n.a. n.a. n.a. n.a. 0

Extr. and other expenses n.a. n.a. n.a. n.a. 0

Extr. and other P/L 0 0 0 0 0

P/L for period [=Net income] 3 816 400 5 686 800 6 385 900 7 274 800 9 246 500

Appendix 38

H&M Growth Rate

2 001 2 002 2 003 2 004 2 005
Operating revenue (Turnover) 39 698 800 45 522 300 48 237 700 53 695 000 61 262 200
% 15% 6% 11% 14%
Sales 39 698 800 45 522 300 48 237 700 53 695 000 61 262 200
% 15% 6% 11% 14%
Net Income 3 816 400 5 686 800 6 385 900 7 274 800 9 246 500
% 49% 12% 14% 27%

91
 Appendix 39
H&M important data
Year end 2000 2001 2002 2003 2004 2005

Total assets 15 700 400 20 410 300 25 198 700 25 761 700 28 127 300 33 183 200
Shareholders equity
Cash
Short-term debt 3 033 200 4 038 100 5 287 200 4 703 800 4 885 100 6 484 600
Long-term debt 777 400 940 600 823 800 961 200 1 033 200 774 800

Debt to total assets 0,24 0,24 0,24 0,22 0,21 0,22

Capital Expenditure 3 541 800 3 656 100 1 009 000 2 112 300 3 714 800

Depreciation 900100 1050600 1125600 1232200 1451600

Change in WC 3 080 700 4 935 300 -4 045 000 1 914 400 2 090 500
wc 10645200 13725900 18661200 14 616 200 16 530 600 18 621 100

No. Of Shares 827 536 000 827 536 000 827 536 000 827 536 000 827 536 000

EPS (year end) 4,61 6,87 7,72 8,79 11,17

EPS (average)

Shareholders Dividend 1 117 173 600 1 448 188 000 4 965 216 000 4 965 216 000 6 620 288 000
Suggested DPS
DPS 1,35 1,75 6 6 8

New issue
Deduction
Fusioner
Share repurchase

Payout ratio 0,292729693 0,254657804 0,777527991 0,682522681 0,715977721

92
 Appendix 40

H&M Two-stage DDM

Riskfree rate 3,37%
Market Risk premium 5,50%
Beta stable Growth 0,6291
Beta High Growth 0,6291
Cost of equity stable growth 6,83%
Cost of equity high growth 6,83%
Expected growth rate stable growth 2,50%
Expected growth rate high growth 18,1%
RoE stable growth
Payout ratio Stable growth 0,75

High Growth Stage Expected Growth EPS 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

Terminal value 455,69

Spit 2:1 227,84 In june 2010 HM made a stock split 2:1

93
 Appendix 41

H&M Two-stage FCFE

High Growth Net income Capital Expenditures Depreciation Change in WC Debt ratio FCFE
FCFE 2001 3816400 3 541 800 900100 3080700 0,24 -510131
FCFE 2002 5686800 3 656 100 1050600 4935300 0,24 -25262
FCFE 2003 6385900 1 009 000 1125600 -4045000 0,22 9632364
FCFE 2004 7274800 2 112 300 1232200 1914400 0,21 5068294
FCFE 2005 9246500 3 714 800 1451600 2090500 0,22 5845247

Future Predictions
Expected growth Cost of Equity
2006 18,1% 6,83%
2007 18,1% 6,83%
2008 18,1% 6,83%
2009 18,1% 6,83%
2010 18,1% 6,83%

Future Growth in FCFE Discounted FCFE

FCFE 2006 6903033
FCFE 2007 8152242
FCFE 2008 9627513
FCFE 2009 11369757
FCFE 2010 13427287

Terminal Value 317847807 297526592

Stock Price 360

Split 2:1 179,77

Appendix 42
Date Company Target price
2005-12-15 Handelsbanken Capital Markets 330 kr
2006-01-20 Evli Bank 350 kr
2006-01-26 credit Suisse 200 kr
2006-01-27 Öhman 290 kr
2006-01-27 Morgan Stanley 320 kr
2006-01-27 Lehman Brothers 280 kr
2006-01-27 Handelsbanken Capital Markets 340 kr
2006-01-27 Carnegie 350 kr

94
 Appendix 43
HOLMEN
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) 17062000 16578000 16239000 16067000 17075000
Sales 16655000 16081000 15816000 15653000 16319000
Costs of goods sold n.a. n.a. n.a. n.a. n.a.
Gross profit n.a. n.a. n.a. n.a. n.a.
Other operating expenses n.a. n.a. n.a. n.a. n.a.
Operating P/L [=EBIT] 2449000 2713000 2338000 1835000 1973000
Financial revenue 44000 20000 n.a. 43000 11000
Financial expenses 199000 169000 212000 224000 244000
Financial P/L -155000 -149000 -212000 -181000 -233000
P/L before tax 2294000 2564000 2126000 1654000 1740000
Taxation 108000 605000 675000 443000 484000
P/L after tax 2186000 1959000 1451000 1211000 1256000
Extr. and other revenue n.a. n.a. n.a. n.a. 0
Extr. and other expenses n.a. n.a. n.a. n.a. 0
Extr. and other P/L 0 0 0 0 0
P/L for period [=Net income] 2186000 1959000 1451000 1211000 1256000

Appendix 44

Holmen Growth Rate

2001 2002 2003 2004 2005
Operating revenue (Turnover) 17062000 16578000 16239000 16067000 17075000
% -2,8% -2,0% -1,1% 6,3%

Sales 16655000 16081000 15816000 15653000 16319000

% -3,4% -1,6% -1,0% 4,3%
P/L for period [=Net income] 2186000 1959000 1451000 1211000 1256000
% -10,4% -25,9% -16,5% 3,7%

95
 Appendix 45
Holmen important data
Year end 2000 2001 2002 2003 2004 2005

Total assets 24 394 000 24 948 000 26 967 000 26 358 000 26 567 000 32 183 000
Shareholders equity
Cash
Short-term debt 3 148 000 5 455 000 4 707 000 3 621 000 4 915 000 7 837 000
Long-term debt 4 232 000 5 421 000 7 075 000 7 371 000 7 803 000 8 267 000

Debt to total assets 0,30253 0,43595 0,43690 0,41703 0,47871 0,50039

Capital Expenditure -2 942 000 1 113 000 181 000 -1 517 000 2 230 000

Depreciation 1 045 000 1 126 000 1 153 000 1 166 000 1 188 000 1 167 000

Change in WC -3 872 000 539 000 903 000 -1 117 000 -2 125 000
Working Capital 4 182 000 310 000 849 000 1 752 000 635 000 -1 490 000

No. Of Shares 79 972 451 84 187 870 84 187 870 84 756 162 84 756 162

EPS (year end) 27,33441295 23,26938548 17,23526204 14,28804669 14,81898154

EPS (average)

Shareholders Dividend 5 516 000 000 800 000 000 880 000 000 3 199 000 000 848 000 000
Suggested DPS
DPS 68,97375197 9,502556603 10,45281226 37,74356843 10,00517225

New issue 474000000

Deduction
Fusioner
Share repurchase

Payout ration 2,523330284 0,408371618 0,606478291 2,641618497 0,675159236

96
 Appendix 46

Holmen Gordon Growth Model

Riskfree rate 3,37%
Market Risk premium 0,055
Beta 0,7
Cost of equity stable growth 7,22%

Expected growth rate Stable growth 2,5%

RoE stable growth
Payout ratio Stable growth

Dividned 2005 848 000 000

DPS 2005 10
DPs 2010 11,32

Gordon Growth Model 2010 246

97
 Appendix 47

Holmen Free Cash Flow To Equity

Net income Capital Expenditures Depreciation Change in WC Debt ratio FCFE
FCFE 2001 2186000 -2942000 1126000 -3872000 0,435946769 6664583
FCFE 2002 1959000 1113000 1153000 539000 0,436904365 1678015
FCFE 2003 1451000 181000 1166000 903000 0,417027089 1498804
FCFE 2004 1211000 -1517000 1188000 -1117000 0,478714194 3203354
FCFE 2005 1256000 2230000 1167000 -2125000 0,500388404 1786588

Future Predictions
Expected Stable Growth Cost of Equity
2006 2,5% 7,22%
2007 2,5% 7,22%
2008 2,5% 7,22%
2009 2,5% 7,22%
2010 2,5% 7,22%

Future Growth in FCFE Discounted FCFE

FCFE 2006 1831252 1707939
FCFE 2007 1877034 1632753
FCFE 2008 1923959 1560876
FCFE 2009 1972058 1492164
FCFE 2010 2021360 1426476
Terminal Value 43896055 40940174

Stock Price 483

Appendix 48
Date Company Target price
2005-11-01 Credit Suisse 236 kr
2006-01-18 Affärsvärlden 350 kr
2006-02-06 UBS 250 kr
2006-02-06 Handelsbanken Capital Markets 293 kr

98
 Appendix 49

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

Appendix 50

TeliaSonera Growth rate

2001 2002 2003 2004 2005
Operating revenue (Turnover) 65 150 000 60 578 000 85 168 000 85 485 000 91 921 000
-7,0% 40,6% 0,4% 7,5%
Sales 57 196 000 59 483 000 82 425 000 81 937 000 87 661 000
4,0% 38,6% -0,6% 7,0%
Net Income 1 838 000 -8 067 000 9 080 000 12 964 000 13 694 000
-539% 213% 43% 6%

99
 Appendix 51
TeliaSonera important data
Year end 2000 2001 2002 2003 2004 2005

Total assets 122715000 94875000 172812000 153042000 153145000 163094000

Shareholders equity 60 179 000 113 949 000 115 834 000 129 113 000 135 694 000

Cash
Short-term debt 33151000 26739000 39827000 30573000 35111000 30270000
Long-term debt 33256000 41220000 52880000 43653000 28794000 37811000

Debt to total assets 0,54 0,72 0,54 0,49 0,42 0,42

Capital Expenditure -29392000 53189000 -1289000 10424000 5773000

Depreciation 8222000 10536000 20844000 17707000 15596000 13188000

Change in WC 8300000 -12507000 12428000 -1683000 5649000

WC -1776000 6524000 -5983000 6445000 4762000 10411000

No. Of Shares 3 001 200 000 4 605 756 725 4 675 232 069 4 675 232 069 4 490 457 213

EPS (year end) 0,612 -1,752 1,942 2,311 3,050

EPS (average)

Shareholders Dividend 1500600000 600000000 1842302690 4675000000 5 610 000 000

Suggested DPS
DPS 0,5 0,1 0,4 1,0 1,2

New issue 0 1 604 556 725 69 475 344

Deduction 0
Fusioner 0
Share repurchase 10 162 617 080

Payout ratio 0,82 -0,07 0,20 0,43 0,41

100
 Appendix 52

TeliaSonera Gordon Growth Model

Riskfree rate 3,37%
Market Risk premium 0,055
Beta 0,6268
Cost of equity stable growth 6,82%

Expected growth rate Stable growth 2,5%

RoE stable growth
Payout ratio Stable growth 0,6

Dividned 2005 5 610 000 000

DPS 2005 1,2
DPS 2011 2

Stock price 49,1

Appendix 53

TeliaSonera FCFE
Net income Capital Expenditures Depreciation Change in WC Debt ratio FCFE
FCFE 2001 1 838 000 -29392000 10536000 8300000 0,72 10810851
FCFE 2002 -8 067 000 53189000 20844000 -12507000 0,54 -17262675
FCFE 2003 9 080 000 -1289000 17707000 12428000 0,49 12462493
FCFE 2004 12 964 000 10424000 15596000 -1683000 0,42 16958516
FCFE 2005 13 694 000 5773000 13188000 5649000 0,42 14722811

Future Predictions
Expected Stable Growth Cost of Equity
2006 2,5% 7,22%
2007 2,5% 7,22%
2008 2,5% 7,22%
2009 2,5% 7,22%
2010 2,5% 7,22%

Future Growth in FCFE Discounted FCFE

FCFE 2006 15090882 14074689
FCFE 2007 15468154 13455098
FCFE 2008 15854858 12862783
FCFE 2009 16251229 12296542
FCFE 2010 16657510 11755228
Terminal Value 361736174 337377517

Stock Price 75,1

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 Appendix 54
Date Company Target Price
2005-11-28 Handelsbanken Capital markets 45 kr
2005-12-01 Morgan Stanley 44,20 kr
2005-12-21 Deutshe Bank 45,50 kr
2006-02-08 Dresdner Kleinwort 46 kr

Appendix 55

Volvo
Profit & loss account
Consolidated 31/12/2001 31/12/2002 31/12/2003 31/12/2004 31/12/2005
th SEK th SEK th SEK th SEK th SEK
12 months 12 months 12 months 12 months 12 months
Local GAAP Local GAAP Local GAAP Local GAAP Local GAAP
Operating revenue (Turnover) 190740000 186198000 183291000 211258000 240596000
Sales 189280000 186198000 183291000 210401000 240559000
Costs of goods sold 155592000 151569000 146879000 163947000 186662000
Gross profit 35148000 34629000 36412000 47311000 53897000
Other operating expenses 35824000 32283000 30529000 33111000 35783000
Operating P/L [=EBIT] -676000 2346000 5883000 14200000 18151000
Financial revenue 1275000 1708000 1296000 820000 835000
Financial expenses 2465000 2041000 5522000 2441000 972000
Financial P/L -1190000 -333000 -4226000 -1621000 -137000
P/L before tax -1866000 2013000 1657000 12579000 18014000
Taxation -326000 590000 1334000 3184000 4908000
P/L after tax -1540000 1423000 323000 9395000 13106000
Extr. and other revenue n.a. n.a. n.a. n.a. 0
Extr. and other expenses n.a. n.a. n.a. n.a. 0
Extr. and other P/L 73000 -30000 -25000 -40000 0
P/L for period [=Net income] -1467000 1393000 298000 9355000 13052000

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 Appendix 56

Volvo Growth rate

2001 2002 2003 2004 2005
Operating revenue (Turnover) 190740000 186198000 183291000 211258000 240596000
% -2,4% -1,6% 15,3% 13,9%
Sales 189280000 186198000 183291000 210401000 240559000
% -1,6% -1,6% 14,8% 14,3%
P/L for period [=Net income] -1467000 1393000 298000 9355000 13052000
% 95,0% -78,6% 3039,3% 39,5%

Appendix 57
Volvo important data
Year end 2000 2001 2002 2003 2004 2005

Total assets 200743000 260925000 239222000 231252000 222896000 257135000

Shareholders equity
Cash
Short-term debt 53570000 88145000 74617000 76979000 79141000 108290000
Long-term debt 58242000 87204000 86080000 81637000 74117000 70077000

Debt to total assets 0,55699078 0,672028361 0,671748418 0,685901095 0,687576269 0,69367064

Capital Expenditure -3355000 -7051000 -5889000 -2998000 9130000

Depreciation 6251000 9961000 10844000 9961000 10305000 9894000

Change in WC -16556000 1461000 21907000 -8460000 -9304000

Working Capital 43147000 26591000 28052000 49959000 41499000 32195000

No. Of Shares 422400000 419400000 419400000 418500000 418500000

EPS (year end) -3,473011364 3,32141154 0,710538865 22,35364397 31,18757467

EPS (average)

Shareholders Dividend 3400000000 3400000000 3400000000 3400000000 5100000000

Suggested DPS
DPS 8,049242424 8,106819266 8,106819266 8,124253286 12,18637993

New issue
Deduction
Fusioner
Share repurchase

Payout ratio -2,317655078 2,440775305 11,40939597 0,36344201 0,390744713

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 Appendix 58

Volvo Gordon Growth Model

Riskfree rate 3,37%
Market Risk premium 0,055
Beta 1,5115
Cost of equity stable growth 11,7%

Expected growth rate Stable growth 2,50%

RoE stable growth
Payout ratio Stable growth 0,8

Dividned 2005 5100000000

DPS 2005 12,2
DPs 2010 22,6
EPS 2010 28,2287025

Stock price 315,1

Split 5:1 63

Appendix 59

Volvo FCFE
Net income Capital Expenditures Depreciation Change in WC Debt ratio FCFE
FCFE 2001 -1467000 -3355000 9961000 -16556000 0,67202836 8330168,81
FCFE 2002 1393000 -7051000 10844000 1461000 0,67174842 6787486,5
FCFE 2003 298000 -5889000 9961000 21907000 0,68590109 -1604497,1
FCFE 2004 9355000 -2998000 10305000 -8460000 0,68757627 16154277,7
FCFE 2005 13052000 9130000 9894000 -9304000 0,69367064 16136124

Future Predictions
Expected Stable Growth Cost of Equity
2006 2,5% 11,7%
2007 2,5% 11,7%
2008 2,5% 11,7%
2009 2,5% 11,7%
2010 2,5% 11,7%

Future Growth in FCFE

FCFE 2006 16539527 14809317,51
FCFE 2007 16953015
FCFE 2008 17376841
FCFE 2009 17811262
FCFE 2010 18256543
Terminal Value 203772704 182455922

Stock Price 436

Split 5:1 87,2

104
 Appendix 60
Date Company Target price
2005-11-24 Evli Bank 385 kr
2006-01-05 Deutsche Bank 400 kr
2006-02-07 Credit Suisse 300 kr
2006-02-07 Kaupthing Bank 380 kr

Appendix 61
% of actual
SEK value Differation
Alfa Laval Actual Stock price 141,7
Alfa Laval DDM Valuation 68,37 48,2% -51,8%
Alfa Laval FCFE Valuation 92,24 65,1% -34,9%
Assa Abloy Actual Stock price 189,5
Assa Abloy DDM Valuation 136,6549 72,1% -27,9%
Assa Abloy FCFE Valuation 139,9534 73,9% -26,1%
Atlas Copco Actual Stock price 169,7
Atlas Copco DDM Valuation 118,2329 69,7% -30,3%
Atlas Copco FCFE Valuation 167,6445 98,8% -1,2%
Axfood Actual Stock price 251,5
Axfood DDM Valuation 282,4426 112,3% 12,3%
Axfood FCFE Valuation 335,7595 133,5% 33,5%
Boliden Actual Stock price 136,7
Boliden DDM Valuation 173,1581 126,7% 26,7%
Boliden FCFE Valuation 215,0633 157,3% 57,3%
Ericsson Actual Stock price 78,15
Ericsson DDM Valuation 83,6 107,0% 7,0%
Ericsson FCFE Valuation 135,56 173,5% 73,5%
H&M Actual Stock price 224
H&M DDM Valuation 227,8443 101,7% 1,7%
H&M FCFE Valuation 179,7666 80,3% -19,7%
Holmen Actual Stock price 221,4
Holmen DDM Valuation 245,8248 111,0% 11,0%
Holmen FCFE Valuation 483,0348 218,2% 118,2%
TeliaSonera Actual Stock price 53,3
TeliaSonera DDM Valuation 49,1 92,1% -7,9%
TeliaSonera FCFE Valuation 75,1 140,9% 40,9%
Volvo Actual Stock price 118,5
Volvo DDM Valuation 63 53,2% -46,8%
Volvo FCFE Valuation 87,2 73,6% -26,4%

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