The company I have chosen to analyse is Tesco PLC
Free cash flow to equity (FCFE): £1,036m (from latest financial statements)
Number of shares: 6.737 billion shares
Cost of equity (r) (CAPM): 7.5%
Constant growth rate (g): 4%
FCFE per share
FCFE per share = 1,036m / 6,737m = £0.154 per share
Valuation using Gordon Growth Model
Value per share = 0.154 × 1.04 / (0.075 − 0.04)
= 0.160 / 0.035
= £4.57 per share (≈ 457p)
Comparison with market capitalisation / market price
Current share price (approx.): 438p
Market capitalisation (approx.): £28bn
Total equity value (model): 6.737bn × £4.57 ≈ £30.8bn
Conclusion (buy / hold / sell)
My model equity value (~£30.8bn) is slightly higher than the market cap (~£28bn), so under these assumptions Tesco looks slightly undervalued → Hold / small Buy.
Why the numbers may differ
The result is very sensitive to r and g, and FCFE can change a lot year to year (CAPEX, working capital, debt movements). The market also prices in expectations and risks beyond a simple one-stage model.
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