Howard University

Financial Modeling and Analysis FINA363 Dr. Russel M. Price

Stock Valuation Project

Student:

Tiago Nunes Barbi Costa

@02711216

Date : December 5th

CHIPOTLE MEX. GR. NYSE-CMG STOCK VALUATION WITH DISCOUNTED FREE CASH FLOWS WEIGHTED AVERAGE COST OF CAPITAL Value Line Beta 1.00 Long Term Debt Adjusted Beta 1.00 Long Term Interest Treasury Bill Return 3.70% Cost of Debt Expected Market Return 11.74% Income Tax Rate (2015-17) Market Risk Premium 8.04% Proportion of Equity Cost of Equity 11.7400% Proportion of Debt Shares Outstanding 30,944,400 Weighted Average Cost of Capital Stock Price $526.66 Infinite FCFTF Growth Market Value of Equity 16,297,177,704 Average Annual P/E Ratio (2015-17) Current and Projected Amounts Working Capital Capital Spending per Share Common Shares Outstanding Long-Term Debt Interest Payment FREE CASH FLOWS Net Profit + Depreciation - Increase In Working Capital - Capital Spending + New Borrowing + After-tax Interest Payment STOCK VALUATION Fractional Years from Current Date Free Cash Flows to Equity (FCFTE) Terminal Value of FCFTE Total FCFTE Present Values of FCFTE Market Value of Equity (FCFTE Method) Stock Value (FCFTE Method) Free Cash Flows to Firm (FCFTF) Terminal Value of FCFTF Total FCFTF Present Values of Total FCFTF Enterprise Value Total Cash Market Value of Firm Debt Market Value of Equity (FCFTF Method) Stock Value (FCFTF Method) Estimated Stock Value 12-Month Target Price Projected 1-Year Gain Forward Annual Dividend Yield Projected 1-Year Return Treynor Index 12/31/13 $400,000,000 $6.85 30,944,400 0 0 0 (Millions of Dollars) 12/31/13 330,000,000 100,000,000 (40,300,000) (211,969,140) Date 11/26/13 12/31/13 0.10 177,730,860 177,730,860 175,823,082 4,887,592,346 157.95 177,730,860 177,730,860 175,823,082 2,703,281,883 532,170,000 3,235,451,883 3,235,451,883 104.56 Thompson/First Call Price Target High 131.25 Mean 146.66 Median -72% Low No. of Brokers -72% -76% 12/31/12 $359,700,000 12/31/14 $612,500,000.00 $7.84 $30,645,800.00 $0.00 0 12/31/14 $397,500,000.00 $112,500,000.00 (212,500,000) (240,186,458) 12/31/14 1.10 57,313,543 57,313,543 50,741,305 12/31/15 $825,000,000.00 $8.83 $30,347,200.00 $0.00 0 12/31/15 $465,000,000.00 $125,000,000.00 (212,500,000) (267,814,040) 12/31/15 2.10 109,685,960 109,685,960 86,905,398 12/31/16 $1,037,500,000.00 $9.81 $30,048,600.00 $0.00 0 12/31/16 $532,500,000.00 $137,500,000.00 (212,500,000) (294,851,888) 12/31/16 3.10 162,648,113 162,648,113 115,328,348

5.00% 40.00% 100.00% 0.00% 11.7400% 5.00% 31.50 12/31/17 $1,250,000,000 $10.80 29,750,000 0 0 12/31/17 600,000,000 150,000,000 (212,500,000) (321,300,000) 12/31/17 4.10 216,200,000 6,810,300,000 7,026,500,000 4,458,794,213

57,313,543 57,313,543 50,741,305

109,685,960 109,685,960 86,905,398

162,648,113 162,648,113 115,328,348

216,200,000 3,368,100,890 3,584,300,890 2,274,483,749

0.00%

$620.00 $515.90 $520.00 $344.00 21

QUESTIONS

1. Give one major argument for, and one major argument against, using the Treasury Bill return, instead of the Treasury Bond return, as the risk-free rate for calculating the cost of equity with the Capital Asset Pricing Model. The securities are similar in that all are issued by the United States to fund its debt, and all are backed by the full faith and credit of the U.S. government. There are two key differences between the three types of U.S. Treasuries, however: their maturity dates and the way that they pay interest. Treasury bills (or T -bills) are short-term bonds that mature within one year or less from their time of issuance. T-bills are sold with maturities of four, 13, 26, and 52 weeks, which are more commonly referred to as the one-, three-, six-, and 12-month T-bills, respectively. Due the short term maturity they offer lower interest rate than the bonds. Using bonds gives higher risk free rate standard. Although the higher return, the bonds rates are more volatile, thus the use of bonds con be more difficult due the uncertain conditions.

2. List three major strengths and three major weaknesses of the Discounted Free Cash Flows methods of Stock Valuation. The Discounted Free Cash Flows method is accurate in terms of stock valuation if the future projections will be accomplished for the business. But that is not predictable at all, and the expectations can be far from the reality. Also, the model can be sensitive and the variations can cause big changes in the stock forecasted price. Another weakness of the model is that it does not consider the future expected growth in the company, so it can under valuate a stock with great potential. Another important problem is that the model simplifies the operations into a straight line between today and the future projections. This is not always true in reality.

3. List three major characteristics of companies for which it is not appropriate to use the Discounted Free Cash Flows methods of Stock Valuation. Companies that have less than five years of operation are not good candidate for the model. Also, companies that have no debt at all can be undervalued. Another important problem is that if the company has volatile gains, so the forecast would be very inaccurate.

4. Based on the Estimated Stock Value calculated by you, would you recommend buying it at the Stock Price? Why or why not? Based on the estimations, the stock price of Chipotle Mexican Grill is evaluated by the model being $131.25 and the current stock price is $526.66. Thus, I would not recommend the stock purchase, since it is over valuated according to the model. The reason for the high stock price is the future expectations This is due the high expected market return of 11.47%, so the present value of future cash flows is lower. 5. Based on the projected 1-Year Return calculated by you, would you recommend buying the stock? Why or why not? Even considering the 1 year forward, the stock price is overvalued. The 1-year forward stock price is forecasted as $146.66, much less than the current price. Thus, I would not recommend the purchase of the stock price.

6. Does the Stock Value calculated by you appear to be reasonable? If yes, list three key features of the valuation model that provided a reasonable stock value. If not, list three key features of the valuation model that provided an unreasonable stock value. The stock price is not reasonably valuated. The first possible issue is that the expected market return of 11.47% can be higher than the investor`s perceptions, so the cash flow of the company are more valuable in the present value. This issue explains why the stock value is currently higher than the projection. Also, another important factor is that the future cash flows beyond the year 2017 are not considered. Thus, the model have a big undervaluing bias. Another important factor is that the future expectations of company growth are very high, given the EPS growth of the last quarters. The model does not considers the growth of the stock after 2017, then undervaluing even more the stock price.