Equity Valuation Using

The Problem

Till date, several studies have been performed to determine the value of the stock of the company using different valuation techniques such as Dividend Discount Model (DDM), Discounted Cash Flow Model (DCF) and Comparable Companies Analysis. Although all the models have their own pros and cons, many of the studies have either utilised Dividend Discount Model (DDM) or Comparable Companies Analysis. This is so because, both the above models are less sophisticated from a technical perspective (CFI, 2020). However, the major limitation of both Dividend Discount Model (DDM) and Comparable Companies Analysis is that both the models are based on certain assumptions (CFI, 2020). Thus, these models are not suitable many of the companies. Therefore, the present study will apply Discounted Cash Flow Model (DCF) for Unilever as this model does not require any assumptions regarding the distribution of dividends, and is suitable for companies with unknown or unpredictable dividend distribution.

Theoretical Framework and Background Information

Valuation is an important concept for investment-related decisions. Valuation is the process of determining the overall value of an organisation. It is one of the keys through which investors can determine whether or not they should invest in an organisation (Avon, 2013). It is computed on the basis of firms’ earning by selling its shares on the stock market and the market value of its assets. Valuation is also defined as the present value (PV) of an organisation. Business valuation is important not only from the viewpoint that it helps investors in making informed decisions. However, it is essential from the standpoint that such information helps other organisations to make decisions regarding activities such as mergers and acquisitions, sale of securities and others (Lieberman, 2003). There are various types of methods and techniques that can be used for computing valuation of an organisation. One such method for determining the value of Unilever is Discounted Cash Flow (DCF). In simple terms, it can be defined as the price an individual would pay to own the future cash flows of a business along with all the available cash in hand without any debts owed by the organisation. Under the DCF method, future cash flows of the business are estimated and analysed, along with determining firms’ present net worth (Froidevaux, 2004). By using this method for determining the valuation of Unilever, attention

will be given towards computing and analysing the current net worth of the multinational organisation and also determining cash flow that the firm might enjoy in the future (Cercone, 2002). However, there are certain limitations of using the DCF method. One of the key limitations of this model is the fact that it is highly vulnerable as well as inaccurate in calculating the future projections (Evans, 2002). Nevertheless, such limitations can be overcome by conducting an extensive analysis of Unilever’s position and performance. By using this valuation technique, the researcher can closely analyse the company’s performance and the way it functions in the market and is able to achieve its goals and objectives.

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Design and Methods

The purpose of this study will be to evaluate the fair value of stocks of Unilever by conducting the fundamental analysis of its financial performance for the period 2015-2019. The aim is to find out if Unilever is a good investment by comparing its fair value with the current stock price. Thus, the proposed research will try to answer “Is Unilever undervalued, overvalued or true to value at the current stock price (March 31st, 2019)?” .

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Data Analysis (for empirical projects)

As the study will focus on estimating the fair value of Unilever, thus financial data (2015-2019) of the company shall be extracted from the published annual reports (2015-2019) of the company. These reports will be the foundation for the analysis. From the financial statements of the company, financial information and performance will be extracted to perform quantitative analysis. In addition, qualitative information such as the company’s management, strategies and goals will also be considered. Monthly Market data of Unilever and stock market will be collected from websites such as Yahoo Finance, Bloomberg, etc. Finally, the stock valuation will be based on Discounted Cash Flow Model (DCF).

Work Plan

Work Plan Work Plan

References

Avon, J. (2013). The Handbook of Financial Modeling: A Practical Approach to Creating and Implementing Valuation Projection Models. 1st ed. New York, NY: Apress. Cercone, Louis J Jr., 2002. Uniform Standards For Business Valuations, Cpa Journal, vol 72, no 2, p 564 – 570. CFI. (2020). Stock Valuation. [Online]. Available through:

Evans, Frank C., 2002. Valuation Essentials For CFOs, Financial Executive, vol 18, no 2, p 63-65. Froidevaux, P. (2004). Fundamental Equity Valuation - Stock Selection based on Discounted Cash Flow. Doctor. University of Fribourg. Lieberman, Martin J., 2003. Business Valuation Basics, CPA Journal, vol 73, no 1, p 59.


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