I. Valuation

you must select one company (stock) to analyze the company is (Cummins Inc. (CMI)).

A. As part of your discounted cash flow analysis, you have to show your calculation of the required rate of return (k) for each stock using the CAPM model. Explain every detail how you derived the market risk premium and risk free rate for each stock.

B. Calculate the sustainable growth rate (g) for each stock selected (you have to show all work).

C. Prepare the following discounted cash flow analysis models to ultimately derive the intrinsic value for each stock selected in your sector.

1. Prepare a constant growth Dividend Discount Model (DDM) for each stock using the inputs calculated above. Show all calculations to derive the Price (P0) of the stock.

2. Prepare a constant growth (one stage) free cash flow to the firm model (FCFF) for each stock showing all work including “how you derived” the company’s free cash flow using public financial statements and the company’s weighted average cost of capital (WACC). (Note: Use the most recent 2017 year-end financial statements for each stock.)

3. Based on your analysis and results of the above models, weight each model’s results to determine the stock’s intrinsic value. “Show all work and explain the logic behind the weightings of the models for each stock”.

4. Compare the stock’s intrinsic value to the market value on the corresponding financial statements date (i.e. December 31, 2017) and explain whether each stock is overvalued or undervalued.

5. Calculate the P/E ratio for each stock using the inputs from section A and B above. Show all work.

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