ILLUSTRATION 5.7: FCFE Stable Growth Model:
ExxonMobil
Earlier in this chapter, we valued ExxonMobil using a
modified dividend discount model and found it to be
significantlyundervaluedatitscurrentpriceof$60ashare.In
thisillustration,wevalueExxonMobilusingastablegrowth
FCFE model instead, with the following assumptions:
- To estimate ExxonMobil’s cost of equity, we will
continuetousethesameparametersweusedinthe
dividend discountmodel: abeta of0.8, a risk-free
rate of 4.5%, and a market risk premium of 4%,
resulting in a cost of equity of 7.7%. - High and rising oilprices have clearlypushed up
ExxonMobil’sincomein 2004 butitisunlikelythat
oilpriceswillcontinue to rise foreveratthesame
pace.Ratherthanusethenetincomefrom 2004 of
$25.330billionasourmeasureofearnings,wewill
usetheaveragenetincomeof$18.405billionover
thepreviousfiveyearsasa measureofnormalized
netincome.Nettingouttheinterestincomefromcash
from theseearningsyieldsthenoncash netincome
value for the base year. - Based on the normalized net income of $18.086
billionandthenoncashbookvalueofequityatthe