Calculate the P/E ratio for Kellogg using its most recent fiscal year end earnings. Based upon its P/E ratio, what can you conclude about how Kellogg’s value compares to its industry peers?

Valuation

Part I – Kellogg Company

Kellogg Company, together with its subsidiaries, manufactures and markets ready-to-eat cereal and convenience foods. Kellogg is part of the packaged foods or food processing industry.  Use the information posted on Moodle/used in class and information found on Yahoo! Finance to answer all the questions in this part.  The average P/E (ttm) for the packaged foods industry is 42.

1. Calculate the cost of equity capital using the capital asset pricing model; choose the beta (either company or industry) which you believe results in the most realistic cost of equity capital.
2. Calculate the firm’s value per share using the discounted dividend model taking into account growth and using the cost of equity capital calculated in #1 above.
3. Calculate the firm’s value per share using the simplified leveraged free cash flow and the cost of equity capital calculated in #1 above.
4. Calculate Kellogg’s value using the industry average P/E ratio and trailing twelve months earnings per share.
5. Calculate the P/E ratio for Kellogg using its most recent fiscal year end earnings.
6. Based upon its P/E ratio, what can you conclude about how Kellogg’s value compares to its industry peers?

Part II – Amazon

Amazon currently trades at a P/E of 138.

1. Why do you believe Amazon trades at a P/E so much higher than Kellogg?