Valuation Financial statement analysis - Essay Example

The company manufactures and distributes different brands specializing in consumer products including hygiene, nutritional and personal care products. Further, its portfolio has items such as Lipton, Knorr, Magnum, Hellmann’s, Lux, Dove, Omo and Axe. Notably, the company product retails in more than 170 countries around the globe. Financial statement trends Table 1: Unilever financial data from 2008-2012     2008 2009 2010 2011 2012       EPS 1.79 1.21 1.51 1.51 1.58 r 15% DPS 0.73 0.77 0.80 0.85 0.89 g 0.05 Residual Earnings 38,785.00 35,354.00 37,924.00 38,813.00 41,625.

00   g in RE 0.05 0.07 0.02 0.07 0.06   discount factors 0.87 0.786 0.675 0.592 0.497   Income 39,523.00 39,823.00 44,262.00 46,467.00 51,324.00     Average EPS growth rate5.4%                   Table 2: Unilever PLC financial projections from 2013-2017     2013 2014 2015 2016 2017       EPS 1.67 1.76 1.86 1.97 2.09 r 15% DPS 0.93 0.98 1.03 1.08 1.13 g 0.05 Residual Earnings 44,123.00 46,770.00 49,576.00 52,551.00 55,704.00   g in RE 0.05 0.07 0.02 0.07 0.06   discount factors 0.87 0.786 0.675 0.592 0.

497   Income 54,403.00 57,668.00 61,128.00 64,795.00 68,683.00   Average EPS growth rate5.4%                   Forecasting Forecasted Earnings Earning are the net proceeds that a firm gets from its operations. As such, Unilever PLC has reported increased retained earnings from the year 2008 to 2012. The growth in earning ranges from 2% to 7%. Therefore, to forecast future probable earning, the company can use a model of the form:Y= a+bxa, where Y is the forecasted earning, a represent the prior year’s earning, b is the average growth rate, x is the expected earnings.

Forecasted Dividends Dividends are issued based on the company’s financial performance. As such, the directors pay dividends when companies make profits. Nevertheless, directors may resolve to pay dividend from the retained earnings of the prior years.1 Based on the information derived from Unilever PLC financial statements, the company has consistently made profits from the year 2008 and the directors have paid dividends consecutively for all the five years. It is apparent that the dividends have been growing at a rate of 5% every year and as such, the 2012 dividend payout can be forecasted at the same rate to determine the probable dividend to be paid in future.

Forecasted cash flows Cash flows are gross revenues that an organization receives from its operations. The information derived from the financial statements shows that Unilever cash flows have been on the increase. The forecasted cash flows can be given by a model of the form: Y=a+bx where Y is the forecasted cash flow, A is the cash flow from the prior year, b is the expected growth rate and x is the expected cash flows. Estimation of parameters of the model The parameters of the model include variables used to determine forecasted earning, dividends and the cash flow.

These include; cost of capital, growth rate and any other cost incurred. To start with, the cost of capital is estimated based on the prevailing interest rates at which British financial institution were lending capital. The market