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P&G DCF

Before doing anything, I worked on calculating the WACC for P&G. I got all the relevant values from P&G's Yahoo finance page and P&G's 2020 10-K. For the cost of debt, I divided 2020 interest expenses ($465,000) by 2020 total debt ($30,092,000).

For the weight of debt, I divided the total debt by total debt and market capitalization ($345,583,000). I found the effective tax rate for 2020 in the 10-K, which was 17.2%. I subtracted that value from 1 to get the tax deductible. I multiplied all of these values together to get the total debt portion of capital. For the cost of equity, I used the Capital Asset Pricing Model (CAPM) formula. The risk-free rate is 0.9340%, P&G's beta is 0.4, the S&P's long term average return is 9.24%. I used these values to calculate the cost of equity. The weight of equity is just the market cap divided by market cap and total debt. I multiplied the cost and weight to get the total equity portion of capital. Adding the debt and equity portions together, I received a value of about 4%. To be on the conservative side, I used a perpetual growth rate of about 2%. Now that we have all the relevant values to calculate the discount rate and terminal value, let's get started on the DCF.

I copied the future cash flows from the Cash flow statement. To calculate discount factor, I divided 1 by 1 + WACC (4%), and then raised that to the power of the corresponding future year. I proceed to divide all the future cash flows by the discount factor to get the present value of future cash flows. 

To get the terminal value, I multiplied the last future cash flow value by 1 x perpetual growth rate (2%), then I divided that by the difference between the WACC (4%) and the perpetual growth rate (2%). To get the present value of the terminal value, I divided it by the last future cash flow's discount factor. 

I proceeded to add the present value of cash flows and present value of the terminal value, which sums to the Enterprise value. I converted the Enterprise value to Equity value by subtracting financial liabilities (Long term debt and Debt due within one year) from 2020 and adding Cash from 2020.

To get the Fair value of equity, I divided the Equity value by the amount of shares outstanding, which can be found in the 10-K. I used the same method to get the Fair value of the company, which uses Enterprise value instead of Equity value.

Conclusion: Comparing these values (198.3 for fair value of equity and 205.75 for fair value of company) with the current stock price of 139.08, we can see that P&G is significantly undervalued as a stock. 

P&G DCF:

 https://docs.google.com/spreadsheets/d/e/2PACX-1vSiEpLo7giy6qXrHGQpZOegK9p9oTFI9vIVK8UwUrKPKmbEMZp-qAQDeYiF71xBFg/pubhtml





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