Carnival Corp. provides cruises to major vacation destinations. Carnival operate
ID: 2631844 • Letter: C
Question
Carnival Corp. provides cruises to major vacation destinations. Carnival operates 93 cruise ships with a total capacity of 180,746 passengers in North America, Europe, the United Kingdom, Germany, Australia, and New Zealand. The company also operates hotels, sightseeing motor coaches and rail cars, and luxury day boats. These activities generated earnings per share of $2.41 for 2010. The stock price at the end of 2010 was $38.00. The previous stock prices and dividends are shown in the following table.
Carnival is a firm in the General Entertainment industry, which is in the Services sector. The following table shows some key statistics for Carnival, the industry, and the sector.
Use the various valuation models and relative value measures to assess whether Carnival stock is correctly valued. Compute value estimates from multiple models. The appropriate required rate of return is 11 percent.
Carnival Corp. provides cruises to major vacation destinations. Carnival operates 93 cruise ships with a total capacity of 180,746 passengers in North America, Europe, the United Kingdom, Germany, Australia, and New Zealand. The company also operates hotels, sightseeing motor coaches and rail cars, and luxury day boats. These activities generated earnings per share of $2.41 for 2010. The stock price at the end of 2010 was $38.00. The previous stock prices and dividends are shown in the following table. Use the various valuation models and relative value measures to assess whether Carnival stock is correctly valued. Compute value estimates from multiple models. The appropriate required rate of return is 11 percent. Carnival is a firm in the General Entertainment industry, which is in the Services sector. The following table shows some key statistics for Carnival, the industry, and the sector.Explanation / Answer
Carnival Corp. provides cruises to major vacation destinations.Carnival operates 79 cruise ships with a total capacity of 136,960 passengers in North America, Europe, the United Kingdom, Germany, Australia, and New Zealand.The company also operates hotels, sightseeing motor coaches and rail cars, and luxury day boats.These activities generated earnings per share of $2.73 for 2006. The stock price in January of 2007 was $51.95.The previous stock prices and dividends are shown in the following table. Years 2000 2001 2002 2003 2004 2005 2006 Annual Dividend $0.42 $0.42 $0.42 $0.44 $0.525 $0.80 $1.025 Stock Price in January $40.30 $29.35 $24.96 $22.59 $42.26 $55.44 $50.58 Carnival is a firm in the General Entertainment industry, which is in the Services sector. The following table shows some key statistics for Carnival, the industry, and the sector. Key Statistic Carnival General Entertainment Services Sector P/E ratio 30.37 26.20 25.66 Dividend Yield 0.50% 2.09% 1.33% Next 5-years Growth 15.0% 13.28% 13.44% QUESTIONS 1) Use the various valuation models and relative value measures to assess whether Carnival stock is correctly valued.Compute value estimates from multiple models.The appropriate required rate of return is 1.5 percent. It will be useful to calculate the stock price for January of 2007 from various methods to compare to the actual value realized at the time, $ 51.95 per share. Note that the growth rate is currently the same of higher than the discount rate, so the constant growth rate model cannot be used. 2) Determine the dividends to year 5 with the same growth rate that the dividends have been growing and then use a terminal P/E ratio of 26 (which is a decline from the current P/E of 30) to compute the future price.Then find the PV of these cash flows.So first, determine the historical dividend growth rate
The two models that come to mind for doing this valuation are the comparable companies (or multiples) model and Discounted cash flow. The data you've been given is pretty basic, so it shouldn't be too hard. Let's compute the 2007 value based on dividend yield. Dividend Growth: (2006 dividend / 2000 dividend) ^ (1/# years) - 1 = (1.025/.42)^(1/6) - 1 = 16% 2007 Dividend: 2006 dividend * (1 + growth rate) = 1.025*(1+.16) = $1.189 Value based on Entertainment div. yield = Dividend/Yield = 1.189/.0209 = $56.89 Value based on Services div. yield = Dividend/Yield = 1.189/.0133 = $89.40 $51.95 looks undervalued considering the two values above. Try some other multiples valuations similar to the one above. Try growing earning per share by 15% to get EPS for 2007 and do a P/E valuation. For DCF, forcast the next 5 years of dividends using the rate above: $1.189, $1.379, $1.600, $1.856, $2.153 Then forecast earnings per share for 2011 using the 15% growth rate: 2.73*(1+.15)^6 = $6.31 Use a P/E of 26 to get a terminal value: $6.31*26 = $164.18. Hmmm. That looks too high. I think your EPS for 2006 is wrong. If the current P/E ratio is 30 and the share price for 2006 is $50.58, then it should be $1.69. So that would come to: 1.69*1.15^6= $3.90 That times 26 is $101.40. Add that to the $2.153 in the last year's cash flow. Then discount and sum each of the cash flows using the equation: CF/(1+r)^n, where CF is the cash flow in each year, r is the discount rate of 1.5% from above, and n is the year number that corresponds to the cash flow (2007=0, 2008=1, etc.). If I plug them into excel, I get: $103.44. Again, the $51.95 per share looks way undervalued based on the computations above. Good luck!