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PROBLEM SET-VALUATION
Q1: Newell Corporation, a manufacturer of do-it-yourself hardware and housewares, reported earnings per share of $2.10 in
1993, on which it paid dividends per share of $0.69. Earnings are expected to grow 15% a year from 1994 to 1998, during
which period the dividend payout ratio is expected to remain unchanged. After 1998, the earnings growth rate is expected to
drop to a stable 6%, and the payout ratio is expected to increase to 65% of earnings. The firm has a beta of 1.40 currently,
and it is expected to have a beta of 1.10 after 1998. The treasury bond rate is 6.25%.
A. What is the expected price of the stock at the end of 1998?
B. What is the value of the stock, using the two-stage dividend discount model?
Q2: Church & Dwight, a large producer of sodium bicarbonate, reported earnings per share of $1.50 in 1993 and paid
dividends per share of $0.42. In 1993, the firm also reported the following:
Net Income = $30 million
Interest Expense = $0.8 million
Book Value of Debt = $7.6 million
Book Value of Equity = $160 million
The firm faced a corporate tax rate of 38.5%. (The market value debt-to -equity ratio is 5%.) The treasury bond rate is 7%.
The firm expects to maintain these financial fundamentals from 1994 to 1998, after which its is expected to become a stable
firm, with an earnings growth rate of 6%. The firm's financial characteristics will approach industry averages after 1998. The
industry averages are as follows:
Return on Assets = 12.5%
Debt/Equity Ratio = 25%
Interest Rate on Debt = 7%
Church and Dwight had a beta of 0.85 in 1993, and the unlevered beta is not expected to change over time.
A. What is the expected growth rate in earnings, based upon fundamentals, for the high-growth period (1994 to 1998)?
