Free cash flows valuation model (FCF):
In this model we take the projected net income of the company for future years and adjust the net income with cash and non cash items in the financial statements of the company. The cash and non-cash items include depreciation charge for the year, capital expenditure, changes in the working capital of the company in future years.
Depreciation is added to the net income; however capital expenditures and changes in the working capital are deducted from it. These adjustments drive the value of the free cash flows for the future years. The free cash flows are thendiscounted to the present value through a discounting factor; usually the WACC of the company is used as the discounting factor. The discounted free cash flows are the value of the company.
The free cash flows of the United Parcel Service for the following ten years start from 1999 are calculated on the assumption of 10% annual growth rate and all related cash and non-cash items will also increase by 10% annually. The derived cash flows of the ten years are thendiscounted to the present value by the discounted factor of 7%.
This gives the present value of the United Parcel Service on the basis of the free cash flows valuation model. The value is thendivided by the number of the issued shares of the United Parcel Service, which gives the estimated price per share of the United Parcel Service.Share price of $8.14 is calculated through the free cash flows valuation model.
PE Ratio Valuation Model:
This model is used for calculating the value of the company. In this model, the PE ratio of the comparable companies is taken as a multiple, which is multiplied by the earnings of the company. This gives the value of the company on the basis of the PE ratio valuation model.
The value of the United Parcel Service Company on the basis of the PE ratio is calculated by taking the average of the PE ratios of the comparable company as a multiple, which is then multiplied by the earnings of the United Parcel Service gives the value of the United Parcel Service.
In order to derive the share price of the United Parcel Service the value calculated through PE ratio is divided by the issued shares of the company.
Share price $38 has been calculated on the basis of the PE ratio model. The calculations of the share price are given in the stock price sheet of Excel.
The Financial Performance of United Parcel Service and FedEx:
The revenue of the United Parcel Service is about $24 billion in the 1999, whereas FedEx showed the revenue in 1999 about $5 billion less than the revenue of the United Parcel Service, this is mainly due to the focus of FedEx especially on air route of courier as compared to the ground route. On the other hand, the growth in the revenue of FedEx was higher than the growth of the United Parcel Service growth in the revenue of United Parcel Service was 10% and that of the FedExâ€™s the growth was 11%.
The invested capital of the United Parcel Service was $15.9 billion in the year of 1997 which increased to $17 billion in 1999 with the increase of 7%. On the other hand, the invested capital of FedEx is $9.04 billion in 1997 and $9.6 billion in 1999, there is significant difference in the invested capital of two companies as compared to the revenue differences……………………………….
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