Introduction

In 2008, Toyota Motor Corporation (Japanese Toyota Jidsha KK) became the world's largest
carmaker for the first time. The corporation has acquired more than 600 subsidiary companies
that specialize in the production of autos, automobile parts, commercial and industrial vehicles,
and other related products. The Toyota Motor Corporation began producing cars in 1936 with
the Model AA Sedan, and the company grew rapidly until it was forced to cease production in
the wake of the post-World War II economic crisis. Toyota was able to reopen production
plants by the 1950s, and they began to research and study how to enhance automobile
production. In fact, they used a lot of Ford Motor Company's essential principles to construct
their production factories, and of course, they improved the designs. Toyota Motor Sales,
U.S.A., Inc. was founded in 1957 and the Toyopet sedan was produced the following year,
which was a financial failure due to its high price and poor performance. The Land Cruiser, a
utility vehicle, outsold the Toyopet in 1958 by a wide margin. The Toyota Corona, which was
reintroduced after a redesign, quickly became a top seller in the United States. In 1986, Toyota
joined with General Motors Corporation, which led to the introduction of Toyota-branded
vehicles in the United States. Automobile manufacturer Toyota has acquired factories and
distributors around the world for the production of rubber and cork products, as well as other
types of metal and plastic and cotton and woollen goods.

Automobile manufacturers such as Toyota Motor Corporation are vying for market share. For
the past five years, the automobile industry has been in turmoil. Consumers' tastes for smaller,
more fuel-efficient cars have changed away from large, gas-guzzling trucks as a result of rising
fuel prices and growing environmental concerns. In response to the shift, some automakers
expanded their small-car lineups and diversified into the production of hybrid electric motor
vehicles. However, some automakers were more adamant about focusing on smaller cars
because they hoped that the price of gasoline would eventually fall, bringing consumers back to
the big-car fold. Fuel prices fell in the second half of 2008 as a result of the worldwide economic
crisis triggered by the collapse of the US banking system. This had a cascading impact
throughout the developed and emerging worlds, with many Western countries following the
United States into recession. Revenues in the industry were down 15.4 percent in 2009.

In 2013, industry sales is expected to expand at a rate of 2.1 percent, bringing total revenue to
$2.3 trillion. A five-year average growth rate of 2.2 percent per year is predicted in the business
because of the steep drops followed by a rebound. Production has been bolstered by expansion
in the BRIC countries during the previous five years. Demand for automobiles grew as a result
of rising income levels. Automobile manufacturers in the West have also relocated production
to BRIC countries in order to take advantage of the low-cost labour available there. Motor
vehicle demand in the Western world is expected to improve over the next five years as
emerging nations continue to grow. Over the next five years, the industry's revenue is expected
to expand at an annualized rate of 2.5 percent to an anticipated $2.6 trillion.

Calculation
Calculate the risk free rate, market premium and the Beta coefficient for your company. Then
calculate the cost of equity. Make sure you discuss the choice of estimation periods and
processes you used for the risk free rate, market premium, beta, and the cost of equity

Risk free rate.

The risk-free rate of return, sometimes referred to as the "risk-free rate," is the hypothetical
rate of return on an investment with regular payments made over a specified period of time
that is expected to meet its payment commitments in full at all times.

For any other investment to be considered attractive to investors, its rate of return must be
greater than the risk-free rate.

Risk-free interest rates in a given currency are commonly derived from yields to maturity on
risk-free bonds issued by the same currency's government, whose risk of default is so minimal
as to be negligible. The return on T-bills, for example, is frequently referred to as the risk-free
return in US dollars.

Market premium
The difference between the projected returns on a market portfolio and the rate that is
considered risk-free is what is known as the market risk premium. In order to pay for the risk
and opportunity costs, investors are required. It is common practice to utilize long-term US
yields, which have a reduced default risk, as a proxy for the risk-free interest rate.

Beta coefficient

In the context of financial markets, a beta coefficient measures how likely a stock or a security's
price will fluctuate in response to changes in the market price. The Beta of a stock or securities
can also be used to quantify the investment's systematic risk.

So in the nut shell, in the capital asset pricing model (CAPM), the cost of capital and risk of
assets are utilized to determine projected returns. The risk-free rate, the general market's
return rate, and the stock's beta value are all necessary for the CAPM calculation. When
calculating a company's weighted average cost of capital (WACC), the CAPM can be used to
estimate the cost of debt and equity. In order to use the CAPM, it is necessary to agree on a
rate of return and which one to use.

Three pieces of information are needed to calculate the CAPM: the return on the general
market, the beta value of the stock in question, and the risk-free rate.

Ra=Rrf+ [Ba∗ (Rm−Rrf)]

Where:

Ra=Cost of Equity

Rrf=Risk-Free Rate

Ba=Beta

Rm=Market Rate of Return

The CAPM (Capital Asset Pricing Model) or the Dividend Capitalization Model can be used to
estimate the cost of equity (for companies that pay out dividends).

Dividend Capitalization Model

Here the Formula of Dividend Capitalization:

Re = (D1 / P0) + g

Where:

Re = Cost of Equity

D1 = Dividends/share next year

P0 = Current share price

g = Dividend growth rate

Assumption.

Toyota Motor Corporation has an estimated dividend of 2.14$ and a share price of 23 with a
growth rate of 0.07 percent. When the risk-free interest rate is 9% and the risk-market interest
rate is 13%, and beta equity is 1.6, we must use the Dividend Pricing Model and the Capital
Asset Pricing Model to determine the cost of equity.

Solution:

Dividend Pricing Model

Ke= (d1\Po +g) 100

(2.1\23+ 0.07) x 100

Ke= 16.3%

Capital Asset Pricing Model:

CAPM= Rf + (Rm- Rf) Be x 100

CAPM= 0.09 + (0.13-0.09)1.6 x 100

15.4%

Assumption used to calculate CAPM's Cost of Equity:

This is based on last year's statistics from Toyota Motors.

13 percent is the average market rate.

The risk-free interest rate is currently 4%.

Equity Beta: 1.4. 

Expected Dividend: 1-8

Currently, the market value is 22.

Calculate Ke at a rate of 4 based on the current share price.

Solution

Ke= (Rf + Rm - Rf) Be) x 100\

0.04+ (0.13-0.04) 1.4 x 100

0.04 + (0.09) 1.4 x 100

0.04 + 0.126 x 100

0.166x100

Ke= 16.6%

Calculation of Growth Rate with the help of following assumptions:

Ke= (d1\Po + g) x100\

0.166= (1.8\22 +g) x100

0.166-0.08+g x100

0.086+g x100
g= 8.6%

Calculation of Share price@ rate of 4

P4 = Po (1+g) n

P4= 22(1+0.086)4

P4= 30.60

Calculate the cost of debt and the weighted average cost of capital for firm valuation by using
different assumptions. Make sure you discuss the choice of estimation periods and processes
you used for the cost of debt and the capital structure of the firm.

 The weighted average cost of capital (WACC) is a measure of a company's overall cost of
capital.
 In many cases, firms and investors utilise the WACC as a yardstick by which to measure
the attractiveness of a certain project or acquisition.
 Discounted cash flow analysis also uses WACC as the discount rate on future cash flows.

Calculation of the WACC formula.

WACC= (E/V x Re) + (D\V x (1- Tc))

Where:

E=Market value of the firm’s equity

D=Market value of the firm’s debt

V=E+D

Re=Cost of equity

Rd=Cost of debt

Tc=Corporate tax rate

Assumption:

Toyota Motor Corporation has the capital structure of Stock and Bond in Stock Exchange

Stock (70,000@10)= 700,000

Bond (4,000@100)= 400,000

Total = 11, 00,000

Additional Information:-

Ke= 18%, Market value @19

Kd= 12% Market value @50

By applying WACC Formula,

WACC= (kd (1-t) x D\E+D + kex E\E+D) x 100

0.12(1-0.4) x 1000\1530 + 0.18x 1330\1530) x 100

0.12(0.6) x 0.653 + 0.18 x 0.869)100

0.072 x 0.653+ 0.1x 0.869) x 100

0.047016 + 0.15642) x 100

20.34%

Calculate cash flows to the firm using different assumptions. Describe your choice. Calculate
cash flows to equity using different assumptions. Describe your choice.

Toyota pays a $1.50 dividend per share (Do = 1.50). The dividend is predicted to grow at a rate
of 5% per year for the first year, 3% for the second year, and 10% per year for the next five
years at a share price of $22.

For the cash flow of firm and equity we use the assumption,
For year 1:

d1= do (1+g) n

d1= 1.5 (1+0.05)1

d1= 1.575

For year 2

d2= do (1+g) n

d2= 1.5(1+ 0.05)2

d2=1.653

For year 3

d3= do (1+g) n

d3= 1.5(1+0.05)3

d3= 1.736

For year 4

d4= do (1+g) n x (1+g)n

d4= 1.5 (1+0.05)3 + (1+ 0.1)

d4= 1.909

For year 5

d5= 1.5(1+ 0.05)3 x (1+ 0.1)2

d5= 2.1

Cash flow of Equity:

With the assumption of required rate of return is 15%

PO= D1\ ke-g

Po=15.7$

For year 1

P1 = Po (1+g)n

P1= 15.7(1+0.05)

P1=16.485

For year 2

P2= Po (1+g) n

15.7(1+0.05)*2

P2= 32.97

For year 3

P3= Po (1+g) n

15.7(1+0.05)*3

49.455

For year 4

P4= Po (1+g) n

15.7(1+0.05)*4

65.94

Calculate different estimates of growth rates. Describe and justify your choice.

Calculation of Growth Rate with the help of following assumptions:

Ke= (d1\Po + g) x100\

0.166= (1.8\22 +g) x100

0.086+g x100

g= 8.6%

Calculation of Share price@ rate of 4

P4 = Po (1+g) n

P4= 22(1+0.086)4

P4= 30.60

Calculate different estimates of terminal value for the firm. Justify your choice

The difference between the discount rate and the terminal growth rate is used to determine
the terminal value, which is then multiplied by the last cash flow prediction. Calculating the
company's post-forecast value is known as the terminal value computation.

Calculating the terminal value is as simple as this formula:

[FCF x (1 + g)] / (d – g)

Assumption:

There is an upfront outlay of $20,000 for Toyato Motors.

Ke is 12 percent with an interest rate of 7 percent for two years and 9 percent for the next two
years, and cash flows show a total of $10,000 for the four years.

Compounded values

For year 1= 12,250 by CF 1,225

For year 2= 11,450 by CF 1,145

For year 3= 10,900 by CF 1,090

For year 4= 10,000 by CF 1,000

Solution:

PV= Compounded value of cash in flows

_____________________________

(1 + k) 4

44600\ (1+0.12)*4

44600x 0.636

=28366

Calculate the value of the firm and Value of equity under different assumptions.

Assuming a certain set of assumptions, we computed the value of Toyota Motors Corporation's
equity and firm using the following models: dividend pricing model, capital asset pricing model
and weighted average cost of capital.

Calculate the value of the firm relative to its national and international peer’s and
competitors in the industry.

Toyota Motors current valuation is 177.85-0.58 (-0.33%) At close: 04:00PM EDT

182.50 +4.65 (+2.61%) Pre-Market: 08:26AM EDT

Profitability:

Profit Margin 9.99%

Operating Margin (ttm) 10.41%

Management Effectiveness

Return on Assets (ttm) 3.31%

Income Statement

Revenue (ttm) 30.96T

Revenue Per Share (ttm) 22,220.74

Quarterly Revenue Growth (yoy) -4.50%

Gross Profit (ttm) 4.83T

EBITDA 4.68T

Net Income Avi to Common (ttm) 3.09T

Diluted EPS (ttm) 18.10

Quarterly Earnings Growth (yoy) -5.60%

Balance sheet

Total Cash (mrq) 7.56T

Total Cash Per Share (mrq) 5,467.85

Total Debt (mrq) 25.12T

Total Debt/Equity (mrq) 97.17

Current Ratio (mrq) 1.07

Book Value Per Share (mrq) 18,047.63

Cash flow Statement

Levered Free Cash Flow (ttm) -

Decide what the value of the company is and how you use this for decision making. Discuss
the advantages and the disadvantages of the different approaches you had in this valuation
process

Intrinsic Value: Projected FCF for Toyota Motor is $102.89 as of today. Toyota Motor's stock is
now trading at $177.85. As a result, Toyota Motor's P/IFCF of today stands at 1.7.

Toyota Motor's Intrinsic Value: Projected FCF or its equivalent term's historical and industry
ranks are shown below:

If you take the previous 13 years into consideration, Toyota Motor's highest P/IFCF of 14.70 was
the most recent high. The lowest figure was 0.81. The median was 1.42.

Valuation process advantages and disadvantages.

Advantages

 In many cases, firms and investors utilise the WACC as a yardstick by which to measure
the attractiveness of a certain project or acquisition.
 Future cash flows in DCF analysis can also be discounted using WACC.

Disadvantages

Its drawbacks include a narrow range of potential applications and a set of rigid assumptions
that makes it difficult to assess new initiatives.

 Using the CAPM, investors may simply calculate and stress-test their returns.
 It has been panned because of the implausible assumptions it makes.
 It's still better than either the DDM or WACC models in many cases, despite these
objections.
Discussion and Conclusion
In the Nut shell, Toyota is a major player in the global automobile industry. It now has a large
number of manufacturing facilities across the world and the demand for Toyota cars is
increasing year by year due to the high quality, low cost, and safety of these vehicles. Toyota
makes a wide range of distinctive automobiles and use a variety of marketing techniques to
identify and meet the needs of its target market. Toyota's goal is to maximize profits through
the use of TQM-compliant manufacturing techniques. The company's financial analysis
performed well despite the global financial crisis, unlike other automakers. Due to millions of
recalls, Toyota's image has been ruined, yet the business still has a strong market position and
will recover quickly. Equity costs rise annually in line with expected dividends and a
predetermined pace of expansion. It indicates that the corporation is making money on the
stock market. Toyota was my first choice because I wanted to learn more about how this firm
has been so successful for so long, despite global issues with the gas pedal and the financial
crisis. Consequently, an above review of Toyota's financial accounts can answer many
questions.