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Valuation of Caterpillar

In: Business and Management

Submitted By jpfeifer979
Words 1293
Pages 6
Required Return for Equity Investors
We used the CAPM equation to come up with Caterpillar’s cost of capital. Using weekly returns on one-year treasury bills, the S&P 500, and Caterpillar’s stock since the beginning of 2010, we used regression analysis to determine the beta of the company. The beta we calculated for Caterpillar is 1.56. Next, we estimated the risk free rate using knowledge of what we believe will happen in the near future. Currently, the yield on 10-year treasury bills is 1.98%. This is low because the country is recovering from the latest recession. We believe that because of the expected economic recovery, this will change in the next few years and that a more realistic risk free rate looking forward is 3%. Next, we determined an appropriate expected market return. After looking at the response of historic S&P 500 returns following similar dips in the economy, we decided to use 7.5% as our expected market return in our valuation. The cost of capital for Caterpillar we calculated with the CAPM equation is 10.02%.

Financial Statement Projections
In order to valuate the stock of Caterpillar, it was necessary for our group to use the analyst articles, the company’s annual report, and other outside sources to project Caterpillar’s financial statements over the next few years. First, we projected the revenues and cost of goods sold. One analyst report suggested that the construction market would experience an increase in business in the next few years due to positive trends in US constructions and growth in developing countries. Also, we noted that the growth in revenues has increased drastically since 2009 when there was almost a 40% decrease in revenues. This was due to a decreasing demand resulting from the decline in economic growth worldwide. Following 2009, Caterpillar saw an increase of 32% and 41% in 2010 and 2011...

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