General Mills, Inc.

(GIS)
Annual Income Statement
5/25/2003 5/30/2004 5/29/2005 5/28/2006 5/27/2007
Net Sales 10,506.00 11,070.00 11,244.00 11,712.00 12,442.00
Cost of Goods Sold 6,109.00 6,584.00 6,834.00 7,545.00 7,955.00
Gross Profit 4,397.00 4,486.00 4,410.00 4,167.00 4,487.00
Selling, General & Admin Expenses 2,472.00 2,443.00 2,418.00 2,209.00 2,429.00
Non-Operating Income -28 -5 269 -33 -33
Interest Expense 581 529 446 366 394
Income Before Taxes 1,316.00 1,509.00 1,815.00 1,559.00 1,631.00
Prov. For Inc. Taxes 460 528 664 538 560
Other Income 61 74 89 69 73
Net Income 917.00 1,055.00 1,240.00 1,090.00 1,144.00
in millions of USD

General Mills, Inc. (GIS)

Annual Income Statement --- Common Size (based on Net Sales)
5/25/2003 5/30/2004 5/29/2005 5/28/2006 5/27/2007 Mean
Net Sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold 58.1% 59.5% 60.8% 64.4% 63.9% 61.4%
Gross Profit 41.9% 40.5% 39.2% 35.6% 36.1% 38.6%
Selling, General & Admin Expenses 23.5% 22.1% 21.5% 18.9% 19.5% 21.1%
Non-Operating Income -0.3% 0.0% 2.4% -0.3% -0.3% 0.3%
Interest Expense 5.5% 4.8% 4.0% 3.1% 3.2% 4.1%
Income Before Taxes 12.5% 13.6% 16.1% 13.3% 13.1% 13.7%
Prov. For Inc. Taxes 4.4% 4.8% 5.9% 4.6% 4.5% 4.8%
Other Income 0.6% 0.7% 0.8% 0.6% 0.6% 0.6%
Net Income 8.7% 9.5% 11.0% 9.3% 9.2% 9.6%
General Mills, Inc. (GIS)
Annual Income Statement --- Comparative (Growth)
03/04 04/05 05/06 06/07 Mean Comme
Net Sales 5.4% 1.6% 4.2% 6.2% 4.3% Good growth trend. The higher prices kicking in? Check on internation
Cost of Goods Sold 7.8% 3.8% 10.4% 5.4% 6.9%
Gross Profit 2.0% -1.7% -5.5% 7.7% 0.6%
Selling, General & Admin Expenses -1.2% -1.0% -8.6% 10.0% -0.2% Why the high growth in the last year?
Non-Operating Income 82.1% 5480.0% -112.3% 0.0% 1362.5%
Interest Expense -9.0% -15.7% -17.9% 7.7% -8.7%
Income Before Taxes 14.7% 20.3% -14.1% 4.6% 6.4%
Prov. For Inc. Taxes 14.8% 25.8% -19.0% 4.1% 6.4%
Other Income 21.3% 20.3% -22.5% 5.8% 6.2%
Net Income 15.0% 17.5% -12.1% 5.0% 6.4% Can the return to the growth of previous years?

Comments

The upward trend may finally be reversed --- high input costs (e.g., corn, etc.) able to be passed along to final consumer?

Saving grace? Indication of management's ability to control expenses. Anyone jumping ship?

Running at a 35% tax rate --- Tax/Income Before Tax

Fairly steady net profit margin. Compared to sector?

 Comments
ng in? Check on international exposure.

ars?
General Mills, Inc. (GIS)
Annual Balance Sheet
5/25/2003 5/30/2004 5/29/2005 5/28/2006
Assets
Cash 703 751 573 647
Receivables 980 1,010.00 1,034.00 1,024.00
Total Inventories 1,082.00 1,063.00 1,037.00 1,055.00
Other Current Assets 414 391 411 315
Total Current Assets 3,179.00 3,215.00 3,055.00 3,041.00
Property, Plant & Equipment, Net 2,980.00 3,111.00 3,007.00 2,997.00
Property, Plant & Equipment, Gross 4,929.00 5,319.00 5,468.00 5,806.00
Intangibles 10,166.00 10,200.00 10,317.00 10,259.00
Deposits & Other Assets 190 197 190 1,567.00
Total Assets 18,227.00 18,448.00 18,066.00 18,075.00
Liabilities
Notes Payable 1,236.00 583 299 1,503.00
Accounts Payable 1,303.00 1,145.00 1,136.00 673
Curr. Long-Term Debt 105 233 1,638.00 2,131.00
Accrued Expense 550 665 962 1,540.00
Other Current Liabilities 250 131 149 291
Total Current Liabilities 3,444.00 2,757.00 4,184.00 6,138.00
Deferred Charges/Inc. 1,661.00 1,773.00 1,851.00 1,690.00
Long-Term Debt 5,999.00 5,862.00 2,676.00 2,147.00
Other Long-Term Liab. 1,131.00 961 967 924
Total Liabilities 13,752.00 12,901.00 11,257.00 11,167.00
Shareholder Equity
Minority Interest 300 299 1,133.00 1,136.00
Common Stock 50 50 50 50
Retained Earnings 3,079.00 3,722.00 4,501.00 5,107.00
Treasury Stock 4,203.00 3,921.00 4,460.00 5,163.00
Total Shareholders Equity 4,175.00 5,248.00 5,676.00 5,772.00
Total Liabilities & Shareholders Equity 18,227.00 18,448.00 18,066.00 18,075.00
in millions of USD

General Mills, Inc. (GIS)

Annual Balance Sheet --- Common Size (based on Total Assets)
5/25/2003 5/30/2004 5/29/2005 5/28/2006
Assets
Cash 3.9% 4.1% 3.2% 3.6%
Receivables 5.4% 5.5% 5.7% 5.7%
Total Inventories 5.9% 5.8% 5.7% 5.8%
Other Current Assets 2.3% 2.1% 2.3% 1.7%
Total Current Assets 17.4% 17.4% 16.9% 16.8%
Property, Plant & Equipment, Net 16.3% 16.9% 16.6% 16.6%
Property, Plant & Equipment, Gross 27.0% 28.8% 30.3% 32.1%
Intangibles 55.8% 55.3% 57.1% 56.8%
Deposits & Other Assets 1.0% 1.1% 1.1% 8.7%
Total Assets 100.0% 100.0% 100.0% 100.0%
Liabilities
Notes Payable 6.8% 3.2% 1.7% 8.3%
Accounts Payable 7.1% 6.2% 6.3% 3.7%
Curr. Long-Term Debt 0.6% 1.3% 9.1% 11.8%
Accrued Expense 3.0% 3.6% 5.3% 8.5%
Other Current Liabilities 1.4% 0.7% 0.8% 1.6%
Total Current Liabilities 18.9% 14.9% 23.2% 34.0%
Deferred Charges/Inc. 9.1% 9.6% 10.2% 9.3%
Long-Term Debt 32.9% 31.8% 14.8% 11.9%
Other Long-Term Liab. 6.2% 5.2% 5.4% 5.1%
Total Liabilities 75.4% 69.9% 62.3% 61.8%
Shareholder Equity
Minority Interest 1.6% 1.6% 6.3% 6.3%
Common Stock 0.3% 0.3% 0.3% 0.3%
Retained Earnings 16.9% 20.2% 24.9% 28.3%
Treasury Stock 23.1% 21.3% 24.7% 28.6%
Total Shareholders Equity 22.9% 28.4% 31.4% 31.9%
Total Liabilities & Shareholders Equity 100.0% 100.0% 100.0% 100.0%
 General Mills, Inc. (GIS)
Annual Balance Sheet --- Comparative (Growth)
5/27/2007 03/04 04/05 05/06
Assets
417 Cash 6.8% -23.7% 12.9%
1,119.00 Receivables 3.1% 2.4% -1.0%
1,174.00 Total Inventories -1.8% -2.4% 1.7%
344 Other Current Assets -5.6% 5.1% -23.4%
3,054.00 Total Current Assets 1.1% -5.0% -0.5%
3,014.00 Property, Plant & Equipment, Net 4.4% -3.3% -0.3%
6,096.00 Property, Plant & Equipment, Gross 7.9% 2.8% 6.2%
10,529.00 Intangibles 0.3% 1.1% -0.6%
1,269.00 Deposits & Other Assets 3.7% -3.6% 724.7%
18,184.00 Total Assets 1.2% -2.1% 0.0%
Liabilities
1,254.00 Notes Payable -52.8% -48.7% 402.7%
778 Accounts Payable -12.1% -0.8% -40.8%
1,726.00 Curr. Long-Term Debt 121.9% 603.0% 30.1%
1,671.00 Accrued Expense 20.9% 44.7% 60.1%
408 Other Current Liabilities -47.6% 13.7% 95.3%
5,845.00 Total Current Liabilities -19.9% 51.8% 46.7%
1,433.00 Deferred Charges/Inc. 6.7% 4.4% -8.7%
2,053.00 Long-Term Debt -2.3% -54.4% -19.8%
1,230.00 Other Long-Term Liab. -15.0% 0.6% -4.4%
11,726.00 Total Liabilities -6.2% -12.7% -0.8%
Shareholder Equity
1,139.00 Minority Interest -0.3% 278.9% 0.3%
50 Common Stock 0.0% 0.0% 0.0%
5,745.00 Retained Earnings 20.9% 20.9% 13.5%
6,198.00 Treasury Stock -6.7% 13.7% 15.8%
5,319.00 Total Shareholders Equity 25.7% 8.2% 1.7%
18,184.00 Total Liabilities & Shareholders Equity 1.2% -2.1% 0.0%
in millions of USD

5/27/2007 Mean Comments

2.3% 3.4%
6.2% 5.7% Trend is not really good … or is it?
6.5% 5.9% The last year is interesting. What happened?
1.9% 2.1%
16.8% 17.1%
 16.6% 16.6% Very steady. No big capital expenditures?
33.5% 30.4%
57.9% 56.6% Check on this --- goodwill?
7.0% 3.8%
100.0% 100.0%

6.9% 5.4% What are they including here?

4.3% 5.5%
9.5% 6.4% May help explain the payoff below.
9.2% 5.9% Why the jump in accruals?
2.2% 1.4%
32.1% 24.6%
7.9% 9.2%
11.3% 20.5% Big payoff on LTD after '04 --- check on this.
6.8% 5.7%
64.5% 66.8% Debt ratio has come down

6.3% 4.4% The minority interest should really be in the liabilities section
0.3% 0.3% Where is paid-in Capital or Capital Surplus? They appear to have changed their accounting for equ
31.6% 24.4% Fairly large build up of Retained Earnings --- used for capital expenditures? (see annual report for e
34.1% 26.3% Must have a rather large stock repurchase program. This is good for downside risk along with divid
29.3% 28.8% This section is messed up. Does not match Yahoo or annual report. However, the total equity does
100.0% 100.0% Something is wrong here - A does not equal L+E. Could be something with the source. Does not m
 06/07 Mean Comments

-35.5% -9.9% Large variation in the cash position. Something to be concerned about?
9.3% 3.4%
11.3% 2.2% This inventory growth (like the % of assets) could be troubling. How do they explain it? Designed b
9.2% -3.6%
0.4% -1.0%
0.6% 0.3%
5.0% 5.5%
2.6% 0.9%
-19.0% 176.5%
0.6% -0.1% Now growth in total size. Is it stagnate?

-16.6% 71.1%
15.6% -9.5%
-19.0% 184.0%
8.5% 33.5%
40.2% 25.4%
-4.8% 18.4%
-15.2% -3.2%
-4.4% -20.2%
33.1% 3.6%
5.0% -3.7%

0.3% 69.8%
0.0% 0.0% Note that this is at par value, not market value at time of sale.
12.5% 16.9%
20.0% 10.7% Indication of strong buyback plan.
-7.8% 6.9% Be careful about driving conclusions from this section. If needed, use their annual report numbers.
0.6% -0.1%

Comments
hanged their accounting for equity a couple years back.
ditures? (see annual report for estimates)
r downside risk along with dividends.
However, the total equity does seem to be right - handle with care!
ng with the source. Does not match annual report, see up one line.
mments

bout?

w do they explain it? Designed build up or not?

use their annual report numbers.

General Mills, Inc. (GIS)
Financial Ratios
5/25/2003 5/30/2004 5/29/2005 5/28/2006 5/27/2007 Mean Comments
Profitability
Return on Equity (ROE) 25.3% 23.6% 19.2% 19.8% 22.0% very good - beats any cost of capital. Compared to industry? Driven by high asset/equity?
= Net Profit Margin 8.7% 9.5% 11.0% 9.3% 9.2% 9.6% actually, surprisingly good. Compared to industry?
= Gross Profit Margin 41.9% 40.5% 39.2% 35.6% 36.1% 38.6% downward trend looks bad. However, is it because they have yet to pass along higher input costs to consumers?
- SGA % of Sales 23.5% 22.1% 21.5% 18.9% 19.5% 21.1%
+ NOI % of Sales -0.3% 0.0% 2.4% -0.3% -0.3% 0.3%
- Int. exp % of Sales 5.5% 4.8% 4.0% 3.1% 3.2% 4.1%
- Tax % of Sales 4.4% 4.8% 5.9% 4.6% 4.5% 4.8%
+ Other Income % of Sales 0.6% 0.7% 0.8% 0.6% 0.6% 0.6%
x Asset Turnover (S/A) 0.61 0.61 0.65 0.69 0.64 seems rather low. What is the cause? Is it really low compared to industry? Fixed costs high in this industry?
x Equity Mulitplier (A/E) 4.37 3.52 3.18 3.13 3.55 seems rather high. Is the leverage something to be concerned about or is it a benefit? Coming down by design?
Return on Assets (ROA) 5.8% 6.7% 6.0% 6.3% 6.2% should I even be concerned with this ratio? More relevant would be the ROE?
Earnings & Growth
Earnings per share (basic) 2.49 2.82 3.34 3.05 3.3 3.00 at least the general trend is upward. Will it continue?
Growth in EPS (basic) 13.3% 18.4% -8.7% 8.2% 7.8% growth slowed, are they going to turn it around?
Earnings per share (diluted) 2.35 2.60 3.08 2.90 3.18 2.82 how significant are options on their stock? They don't seem to have preferred stock, so must be employee options?
Growth in EPS (diluted) 10.6% 18.5% -5.8% 9.7% 8.2%
Dividends per share 1.10 1.17 1.24 1.34 1.44 1.26 Matches EPS. Shows a sign of being friendly to owners. Make sure to check dividend yield for downside risk.
Growth in DPS 6.4% 6.0% 8.1% 7.5% 7.0%
Avg. Shares (basic) - millions 369 375 371 358 347 364 Buyback plan. Again, could be a good sign for downside risk. What does the annual report say?
Avg. Shares (diluted) - millions 395 413 409 379 360 391.2
Sustainable Equity Growth 14.8% 14.9% 10.8% 11.2% 12.9% Very good - probably beats a reasonable cost of capital (thought watch the debt level, may add to cost of capital)
= Return on Equity (ROE) 25.3% 23.6% 19.2% 19.8% 22.0%
x retention ratio (1-payout ratio) 55.8% 58.5% 62.9% 56.1% 56.4% 57.9%
payount ratio 44.2% 41.5% 37.1% 43.9% 43.6% 42.1%
Book Value per Share (BPS) 11.31 13.99 15.30 16.12 15.33 14.41 This is probably fairly low due to the high leverage.
Growth in BPS 23.7% 9.3% 5.4% -4.9% 8.4% Can they return it to the high growth? Buybacks should help. Also, pretty good retained earnings numbers.
Efficiency
Asset Turnover 0.61 0.61 0.65 0.69 0.64
LT Asset Turnover 0.74 0.74 0.78 0.83 0.77 both of these seem low, but at least they are moving in the right direction. What are their capital expenditure plans?
Inventory Turnover (avg.) 6.14 6.51 7.21 7.14 6.75 good trend.
Accounts Rec. Turnover (avg.) 11.13 11.00 11.38 11.61 11.28
Accounts Pay. Turnover (avg.) 5.38 5.99 8.34 10.96 7.67 why? See below for the Days in.
Cash Conversion Cycle 24.41 28.34 38.91 49.28 35.24 This is a bit troubling. Would a DCF valuation be necessary?
= Days in Inventory 59.46 56.08 50.60 51.14 54.32 Seems very high (how long will this stuff keep on the shelves?), but the trend is good.
+ Days in Accounts. Rec. 32.81 33.18 32.07 31.43 32.37 holding steady, but still wouldn't they want to get this down a bit?
- Days in Accounts. Pay. 67.86 60.91 43.76 33.29 51.45 this is definitely driving the poor trend in the cash cycle. Why did they cut it down so? Is it beneficial (e.g., discounts)?
Liquidity, Debt, & Coverage
Current Ratio 0.92 1.17 0.73 0.50 0.52 0.77 why so low? Is this typical for the industry? Not a good trend.
Debt Ratio 0.75 0.70 0.62 0.62 0.64 0.67 both of these showing signs of reducing their debt load.
LTD Debt Ratio 0.48 0.47 0.30 0.26 0.26 0.36
Debt-Equity Ratio 3.29 2.46 1.98 1.93 2.20 2.37 Good sign. But, what will this do to ROE in the future?
LTD Debt-Equity Ratio 2.11 1.64 0.97 0.82 0.89 1.28
Interest Coverage (EBIT/Interest) 3.27 3.85 5.07 5.26 5.14 4.52 Good. At least they appear to be able to meet interest payments.
General Mills, Inc. (GIS)
Assumptoins for Forecasting Income Statement & Valuation

Variable 2008E 2009E 2010E 2011E 2012E 2013E 2014E

Forecasting Income Statement
Sales Growth 8.00% 9.00% 10.00% 9.50% 9.50%
COGS as % of Sales 61% 60% 59% 58% 57%
SGA as % of Sales 19% 18% 17% 17% 17%
Non-Operating Income -30 -30 -30 -30 -30
Interest Expense 400 400 400 400 400
Tax Rate 35% 35% 35% 35% 35%
Other Income 75 75 75 75 75

*Note that by not attempting to forecast the balance sheet & cash flow statements we have been able to
drastically cut down the number of assumptions needed. However, it is still best to actually forecast the
statements. At least, one should attempt to make some forecasts for relevant financial ratios (e.g., Asset
Turnover, Debt ratios, etc.). Although not done here, it is useful to compute many of the financials ratios based
on the forecasts. The forecasted ratios will help to check for realism in the assumptions as well as indicate
possible further actions to be taken. For example, if the forecasted asset turnover ratio is way higher than
current levels, then the corporation may need to increase capital expenditures.
 Explanation

International should be strong as well as some of their healthy brands. Weak dollar may help in short term.
assuming an ability to pass along rising input costs to consumers --- note food inflation numbers
shown an ability to control these costs
need more information
need more information
holding the same --- may change if a Republican gets elected President (copy the French?)
need more information
t term.
General Mills, Inc. (GIS)
Annual Income Statement

5/25/2003 5/30/2004 5/29/2005 5/28/2006 5/27/2007

Net Sales 10,506.00 11,070.00 11,244.00 11,712.00 12,442.00

Cost of Goods Sold 6,109.00 6,584.00 6,834.00 7,545.00 7,955.00

Gross Profit 4,397.00 4,486.00 4,410.00 4,167.00 4,487.00

Selling, General & Admin Expenses 2,472.00 2,443.00 2,418.00 2,209.00 2,429.00

Non-Operating Income -28 -5 269 -33 -33

Interest Expense 581 529 446 366 394

Income Before Taxes 1,316.00 1,509.00 1,815.00 1,559.00 1,631.00

Prov. For Inc. Taxes 460 528 664 538 560

Other Income 61 74 89 69 73

Net Income 917.00 1,055.00 1,240.00 1,090.00 1,144.00

*Note, I have forecasted out 5 years only. I have constructed the spreadsheet for a possible 7 year
forecast (probably the maximum one would wish to do), which explains the #VALUE! Errors in the last
two columns. Of course, the assumptions I have used might be considered to be pretty optimistic.
Remember, I based on the assumptins on very little information. The point here is only to demonstrate
the process and mechanics. In order to make better assumptions, we'll need to study the industry and
the corporation more closely. In general, the study of the competitive conditions will tend to focus
attention on the top 3 lines in the income statement.
2008E 2009E 2010E 2011E 2012E 2013E 2014E

13437.36 14646.72 16111.39 17641.98 19317.96 #VALUE! #VALUE!

8196.79 8788.033 9505.723 10232.35 11011.24 #VALUE! #VALUE!

5,240.57 5,858.69 6,605.67 7,409.63 8,306.72 #VALUE! #VALUE!

2553.098 2636.41 2738.937 2999.136 3284.054 #VALUE! #VALUE!

-30 -30 -30 -30 -30 0 0

400 400 400 400 400 0 0

2,257.47 2,792.28 3,436.73 3,980.49 4,592.67 #VALUE! #VALUE!

790.1152 977.2976 1202.857 1393.173 1607.435 #VALUE! #VALUE!

75 75 75 75 75 0 0

1,542.36 1,889.98 2,308.88 2,662.32 3,060.24 #VALUE! #VALUE!

General Mills, Inc. (GIS)
Assumptions and Results for Valuation

Variable 2008E 2009E 2010E 2011E 2012E 2013E

Valuation
Cost of Capital 9% 9% 9% 9% 9%
Common Shares - millions 350 330 310 300 300
EPS - Forecasted 4.41 5.73 7.45 8.87 10.20
BPS - forecasted 17.84 21.10 25.35 30.41 36.22
ROE - forecasted 28.7% 32.1% 35.3% 35.0% 33.5%
Payout Ratio 43% 43% 43% 43% 43%
Retention Ratio 57% 57% 57% 57% 57%
2014E Explanation

just a starting number. Check CAPM. Check Moody's credit rating. T-Bonds probably running at just under 5%
Assumed continued buyback --- if kept, will need to check annual report and possibly adjust payouts

May want to adjust this upward - need to go back and check whether this was increasing or just the dividend itself.
nning at just under 5%
ust payouts

or just the dividend itself.

General Mills, Inc. (GIS)
Valuation

CASE 1: Competitive Equilibrium

Year 2007 2008 2009 2010 2011 2012 2013 2014
Periods 0 1 2 3 4 5 6 7
EPS 4.41 5.73 7.45 8.87 10.20
Book Value 15.33 17.84 21.10 25.35 30.41 36.22
ROE 28.75% 32.10% 35.29% 35.01% 33.55%
Cost of Captial 9.00% 9.00% 9.00% 9.00% 9.00%
AE 3.03 4.12 5.55 6.59 7.46
PV of AE 2.78 3.47 4.28 4.67 4.85

Value per share 35.38

CASE 2: Constant AE Value Price Margin Lower

Assumed AE 4.50 35.38 57.90 5% 55.01
Cost of Capital 9.00% 67.88 57.90 5% 55.01
Terminal Value 50.00 101.00 57.90 5% 55.01
Terminal Period 5
PV of Terminal 32.50

Value per share 67.88

CASE 3: Constant Growth

Assumed Growth 1.50%
Last AE 7.46
Next AE 7.57
Cost of Capital 9.00%
Terminal Value 100.96
Terminal Period 5
PV of Terminal 65.62

Value per share 101.00

Upper Decision
60.80 SELL
60.80 BUY
60.80 BUY
 Case_2_1

4.5
0.07

Page 23
 Case_2_2

4.5
0.08

Page 24
 Case_2_3

4.5
0.1

Page 25
 Case_2_4

4.5
0.11

Page 26
Scenario Summary
Current Values: Case_2_1 Case_2_2 Case_2_3 Case_2_4
Changing Cells:
Assumed_AE 4.50 4.50 4.50 4.50 4.50
Cost_of_Capital 9% 7% 8% 10% 11%
Result Cells:
Value_per_share 67.88 81.22 73.66 63.32 59.66
Decision BUY BUY BUY BUY HOLD
Notes: Current Values column represents values of changing cells at
time Scenario Summary Report was created. Changing cells for each
scenario are highlighted in gray.
Processed & Packaged Goods

P/B ROE
17.95 35.53 1. Very Quick & Dirty
2.46 10.75
1.33 13.08 P/B ROE
10.67 53.74 Industry Avg. 3.74 17.27
2.36 11.17 GIS 4.16 23.82
2.53 16.14
2.33 12.35 If we think that GIS is no better than the average firm in the indu
3.44 55.05
1.46 7.87 Current B Avg P/B Value
2.71 7.14 15.33 3.74 57.31 Slightly less than the current m
1.55 2.55
3.26 14.21
4.16 23.82 2. Quick & Dirty --- but, more advanced
1.86 9.3
9.75 13.22 We begin by running a regression with ROE as the dependent variable and P/B a
2.38 12.39 We should note that the overall regression is pretty poor (R-squared of .35 implie
8.89 47.39 Given a poor regression, we have two options: 1. include another driver of P/B (
3.5 10.2
2.79 12.45 Working with the regression we do have, we can predict the P/B based on the fo
1.81 7.02
4.6 23.93 P/B = 1.55 + .13xROE
0.97 12.51
1.24 8.7 Now, we can sub in the ROE of GIS
1.6 1.3
5.25 22.08 P/B = 4.65
5.16 63.38
2.81 5.16 Here, we would say that GIS's P/B is too low in this industry. Thus, it is underval
7.13 38.58
3.26 7.59 Current B P/B Value
3.95 6.52 15.33 4.65 71.23 Thus, the value exceeds the c
4.48 16.83
0.97 13.51
3.63 6.75
1.71 9
1.96 7.31
1.45 2.98
1.66 9.43
1.44 8.35
5.34 34.38
han the average firm in the industry then,

Slightly less than the current market price of 57.90. If we trust this method, then SELL!!!

he dependent variable and P/B as dependent. Results shown on the next tab.
tty poor (R-squared of .35 implies that ROE explains 35% of the variation in P/B)
1. include another driver of P/B (e.g., payout ratio, growth), or 2. redefine the comparable group

predict the P/B based on the following (look at the regression results):

his industry. Thus, it is undervalued. Again we can use the predicted P/B to get a value.

Thus, the value exceeds the current market price so BUY! actually close to Case 2 with 8.5% cost of capital
SUMMARY OUTPUT

Regression Statistics
Multiple R 0.59
R Square 0.35
Adjusted R Square 0.34
Standard Error 2.70
Observations 39.00

ANOVA
df SS MS F Significance F
Regression 1.00 146.75 146.75 20.16 0.00
Residual 37.00 269.38 7.28
Total 38.00 416.13

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%

Intercept 1.55 0.65 2.38 0.02 0.23 2.87
ROE 0.13 0.03 4.49 0.00 0.07 0.18

RESIDUAL OUTPUT

Observation Predicted P/B Residuals

1 6.0507600294 11.8992399706
2 2.9122486214 -0.4522486214
3 3.2073548192 -1.8773548192
4 8.3571479528 2.3128520472
5 2.96544373 -0.60544373
6 3.5949191819 -1.0649191819
7 3.1148966542 -0.7848966542
8 8.5230660296 -5.0830660296
9 2.5474821623 -1.0874821623
10 2.4550239974 0.2549760026
11 1.8736774533 -0.3236774533
12 3.3504749923 -0.0904749923
13 4.5676297393 -0.4076297393
14 2.7285988417 -0.8685988417
15 3.225086522 6.524913478
16 3.119962855 -0.739962855
17 7.5528885726 1.3371114274
18 2.8425883601 0.6574116399
19 3.1275621562 -0.3375621562
20 2.4398253949 -0.6298253949
21 4.5815617916 0.0184382084
22 3.1351614575 -2.1651614575
23 2.6526058294 -1.4126058294
24 1.7153586776 -0.1153586776
25 4.3472500037 0.9027499963
26 9.5781023504 -4.4181023504
27 2.2042470568 0.6057529432
28 6.437057842 0.692942158
29 2.5120187566 0.7479812434
30 2.3764978847 1.5735021153
31 3.682311146 0.797688854
32 3.261816478 -2.291816478
33 2.4056285394 1.2243714606
34 2.6906023355 -0.9806023355
35 2.4765553509 -0.5165553509
36 1.9281391121 -0.4781391121
37 2.7450639943 -1.0850639943
38 2.6082765722 -1.1682765722
39 5.9051067559 -0.5651067559
 ROE Line Fit Plot
20

15

10 P/B
P/B

Predicted P/B
5

0
0 10 20 30 40 50 60 70
ROE
/B
redicted P/B