Running Head: RESEARCH PAPER 1

RESEARCH PAPER

Name

Institutional Affiliation

Date
RESEARCH PAPER 2

1 The current stock price $177.19

2 The EPS (TTM) 10.61
$2,632.48
The number of shares outstanding
3 Billion
4 The Industry PE Ratio (TTM) – you may need to look elsewhere for this 19.66

2018   Ratios 2019 Ratios 2020 Ratios Average

1 EBIT $19,004,000,000 0.23 $17,646,000,000 0.22 $16,296,000,000 0.20 0.22
Sales 81,581,000,000 82,059,000,000 82,584,000,000

2 Income tax $2,702,000,000 0.15 $2,209,000,000 0.13 $1,783,000,000 0.11 0.13

income before
tax 17,999,000,000 17,328,000,000 16,497,000,000

3 PPE 17,035,000,000 0.21 17,658,000,000 0.22 18,766,000,000 0.23 0.22

Sales 81,581,000,000 82,059,000,000 82,584,000,000

4 Depreciation $24,816,000,000 1.46 $25,674,000,000 1.45 $28,038,000,000 1.49 1.47

PPE 17,035,000,000 17,658,000,000 18,766,000,000

Networking
5 Capital $14,803,000,000 0.18 $9,310,000,000 0.11 $8,744,000,000 0.11 0.13
Sales 81,581,000,000 82,059,000,000 82,584,000,000
 RESEARCH PAPER 3

Forecasted free cash flow

2020   2021 2022 2020 2024 2025

EBIT $16,296,000,000 $16,331,851,200 $16,367,781,273 $16,403,790,391 $16,439,878,730 $16,476,046,464
Depreciation $28,038,000,000 $28,450,158,600 $29,787,316,054 $31,187,319,909 $32,653,123,944 $34,187,820,770
Capex -$1,108,000,000 -$41,285,200 -$41,376,027 -$41,467,055 -$41,558,282 -$41,649,710
Tax $2,097,941,884 $1,517,306,957 $1,787,638,813 $1,789,962,744 $1,792,289,695 $1,794,619,672
Working
Capital $566,000,000 -$11,367,200 -$11,381,977 -$11,396,774 -$11,411,590 -$11,426,425
Free Cash
Flow $45,889,943,904   $46,246,664,357 $47,889,978,135 $49,328,209,215 $50,832,322,498 $52,405,410,770

Create an empty timeline for the next five years

Forecast future sales based on the most recent year’s total revenue growing at the LT growth rate (5Y average) from Reuters for the first five years of
the forecast.

2021 2022 2023 2024 2025

Sales $85,342,305,600 $88,192,738,607 $91,138,376,077 $94,182,397,837 $97,328,089,925

Use the average ratios from step 5. a. above to forecast EBIT, property plant & equipment, depreciation, and networking capital for the next five years.
Ratios Average 2021 2022 2023 2024 2025
1 EBIT 0.20 0.22 $16,331,851,200 $16,367,781,273 $16,403,790,391 $16,439,878,730 $16,476,046,464

2 Income tax 0.11 0.13 $1,785,317,900 $1,787,638,813 $1,789,962,744 $1,792,289,695 $1,794,619,672

3 PPE 0.23 0.22 $18,807,285,200 $18,848,661,227 $18,890,128,282 $18,931,686,564 $18,973,336,275

4 Depreciation 1.49 1.47 $28,450,158,600 $29,787,316,054 $31,187,319,909 $32,653,123,944 $34,187,820,770

Net working
5 Capital 0.11 0.13 $8,755,367,200 $8,766,749,177 $8,778,145,951 $8,789,557,541 $8,800,983,966
RESEARCH PAPER 4

Forecast the free cash flow for the next five years using Eq. 10.2 (Section 10.1 in text).

Free Cash Flow

Forecast 2020 2021 2022 2023 2024 2025
EBIT $16,296,000,000 $16,331,851,200 $16,367,781,273 $16,403,790,391 $16,439,878,730 $16,476,046,464
Depreciation $28,038,000,000 $28,450,158,600 $29,787,316,054 $31,187,319,909 $32,653,123,944 $34,187,820,770
Capex -$1,108,000,000 -$41,285,200 -$41,376,027 -$41,467,055 -$41,558,282 -$41,649,710
Tax $2,097,941,884 $1,517,306,957 $1,787,638,813 $1,789,962,744 $1,792,289,695 $1,794,619,672
Working
Capital $566,000,000 -$11,367,200 -$11,381,977 -$11,396,774 -$11,411,590 -$11,426,425
Free Cash Flow $45,889,943,904 $46,246,664,357 $47,889,978,135 $49,328,209,215 $50,832,322,498 $52,405,410,770

Determine the horizon enterprise value for year 5 using Eq. 10.6, a long-term growth rate of 4%, and a cost of capital of 11% for JNJ.

Free cash flow in 2025 52,405,410,770

WAAC 11%
Growth 4%

Horizon Enterprise Value= 748,648,725,286

Determine the enterprise value of the firm as the present value of the free cash flows.

Free cash flow in 2020 45,889,943,904

WAAC 11%
Growth 4%

Enterprise Value= 655,570,627,200

RESEARCH PAPER 5

Determine the stock price using Eq. 10.4. Note: your enterprise value is in thousands of dollars, and the number of shares outstanding Is in
billions.

Enterprise value 655,570,627,200,422

Outstanding shares 2.6E+12

Stock price= 249

To calculate the JNJ price based on a comparable P/E Ratio, multiply the industry average P/E ratio by JNJ EPS.

P/E Ratio 20
EPS 11

JNP Stock = 209

Compare the stock values from both methods to the actual stock price. 

Using enterprise value $249

Using comparable p/e ratio $209
Actual stock price $177.19

Conclusion
I would recommend the boss invest in JNJ since the enterprise value is expected to grow to $748,648,725,286 from the present value of
$655,570,627,200, representing a 12.3 % growth. There will also be a similar growth of 12.3% in free cash flows meaning the investor's return on
capital will grow.