Problem 18-4
Deployment Specialists pays a current (annual) dividend of $1.00 and is expected to grow at 20% for 2 years
and then at 4% thereafter. If the required return for Deployment Specialists is 8.5%, what is the intrinsic
value of Deployment Specialists stock? (Do not round intermediate calculations. Round your answer to 2
decimal places. Omit the “$” sign in your response.)
Problem 18-5
Jand, Inc., currently pays a dividend of $1.22, which is expected to grow indefinitely at
5%. If the current value of Jand’s shares based on the constant–
growth dividend discount
model is $32.03, what is the required rate of return? (Do not round intermediate
Problem 18-6
A firm pays a current dividend of $1.00 which is expected to grow at a rate of 5% indefinitely.
If current value of the firm’s shares is $35.00, what is the required return applicable to the
Problem 18-7
Tri-coat Paints has a current market value of $41 per share with earnings of $3.64. What
is the present value of its growth opportunities (PVGO) if the required return is 9%? (Do
not round intermediate calculations.
Round your answer to 2 decimal places. Omit the
“$” sign in your response.)
Problem 18-8
Computer stocks currently provide an expected rate of return of 16%. MBI, a large computer company,
will pay a year-end dividend of $2 per share.
a.
If the stock is selling at $50 per share, what must be the market’s expectation of the growth rate of MBI
Problem 18-9
MF Corp. has an ROE of 16% and a plowback ratio of 50%. The market capitalization rate is 12%.
a.
If the coming year’s earnings are expected to be $2 per share, at what price will the stock sell?(Omit the “$” sign in your response.)
b.
What price do you expect MF shares to sell for in 3 years? (Do not round intermediate calculations. Round your answer to 2 decimal
required rate 0.16
g 0.06
a price 10.6
P/E trailing 3.533333
Problem 18-10
The market consensus is that Analog Electronic Corporation has an ROE = 9%, has a beta of 1.25, and plans to maintain
indefinitely its traditional plowback ratio of 2/3. This year’s earnings were $3 per share. The annual dividend was just paid.
The consensus estimate of the coming year’s market return is 14%, and T-bills currently offer a 6% return.
a.
Data
g 0.05
div 8
mkt cap 0.1
Problem 18-11
The FI Corporation’s dividends per share are expected to grow indefinitely by 5% per year.
a.If this year’s year-end dividend is $8 and the market capitalization rate is 10% per year, what must the current stock price be
according to the DDM? (Round your answer to 2 decimal places. Omit the “$” sign in your response.)
b.If the expected earnings per share are $12, what is the implied value of the ROE on future investment opportunities? (Round your
answer to 1 decimal place. Omit the “%” sign in your response.)
c.How much is the market paying per share for growth opportunities (i.e., for an ROE on future investments that exceeds the market
Data
$/share 25
Problem 18-12
The stock of Nogro Corporation is currently selling for $10 per share. Earnings per share in the coming year are expected to be $2. The company has
a policy of paying out 50% of its earnings each year in dividends. The rest is retained and invested in projects that earn a 20%
rate of return per year.
This situation is expected to continue indefinitely.
a.Assuming the current market price of the stock reflects its intrinsic value as computed using the constant-growth DDM, what rate of return do
Nogro’s investors require? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the “%” sign in your response.)
b.By how much does its value exceed what it would be if all earnings were paid as dividends and nothing were reinvested? (Do not round
Data
rf 0.08
rm 0.15
Problem 18-13
The risk-free rate of return is 8%, the expected rate of return on the market portfolio is 15%, and the stock of Xyrong Corporation has a beta
coefficient of 1.2. Xyrong pays out 40% of its earnings in dividends, and the latest earnings announced were $10 per share. Dividends were
just paid and are expected to be paid annually. You expect that Xyrong will earn an ROE of 20% per year on all reinvested earnings forever.
a.What is the intrinsic value of a share of Xyrong stock? (Round your answer to 2 decimal places. Omit the “$” sign in your response.)
b.If the market price of a share is currently $100, and you expect the market price to be equal to the intrinsic value 1 year f rom now, what is
your expected 1-year holding-period return on Xyrong stock?(Round your answer to 2 decimal places. Omit the “%” sign in your response.)
Data
t 5
EPS 18.5
b 1
d 0
Problem 18-14
The Digital Electronic Quotation System (DEQS) Corporation pays no cash dividends currently and is not expected to for the next 5
years. Its latest EPS was $10, all of which was reinvested in the company. The firm’s expected ROE for the next 5 years is 20% per year,
and during this time it is expected to continue to reinvest all of its earnings. Starting in year 6, the firm’s ROE on new investments is
expected to fall to 15%, and the company is expected to start paying out 40% of its earnings in cash dividends, which it will continue to
do forever after. DEQS’s market capitalization rate is 15% per year.
t 6
Inputs Year Dividend Div growth
Term value
Investor CF
beta 0.95 2012 0.78 0.78
mkt_prem 0.08 2013 0.85 0.85
rf 0.02 2014 0.93 0.93
k_equity 0.0960 2015 1.00 1.00
plowback 0.75 2016 1.09 0.0863 1.09
roe 0.09 2017 1.18 0.0845 1.18
Problem 18-15
Calculate the intrinsic value of Honda using the threestage growth model of Spreadsheet 18.1. Treat each scenario independently.
a.ROE in the constant-growth period will be 9%. (Round your answer to 2 decimal places.)
2011 2012 2013 2014 2015 2016
A. Value Line data
P/E 14.35 14.35 14.25 14.14 14.07 14.00
Cap spending/shr 2.65 2.70 2.82 2.93 3.05
B. Cash flow calculations
Profits (after tax) 5700.0 6850.0 6970.0 7090.0 7210.0
Interest (after tax) 702.0 666.9 639.6 612.3 585.0 = r_debt x (1-tax) x LT Debt
Chg Working Cap 925.0 3423.3 3423.3 3423.3
Cap Spending 4860.0 5064.9 5269.8 5474.8
FCFE 6815.0 4481.8 4313.5 4145.3 83203.2 assumes fixed debt ratio after 2011
C. Discount rate calculations
Current beta
0.95 from Value Line
Unlevered beta
0.767 current beta /[1 + (1-tax)*debt/equity)]
terminal growth
0.02
tax_rate 0.35 from Value Line
r_debt 0.036 YTM in 2007 on A rated LT debt
risk-free rate
0.02
market risk prem
0.08
MV equity 81795 97613 98556 99756 100940 Row 3 x Row 11
Debt/Value 0.27 0.23 0.22 0.21 0.20 Row 5 / (Row 5 + Row 28)
k_equity 0.096 0.093 0.092 0.092 0.091 0.091 from CAPM and levered beta
WACC 0.077 0.077 0.077 0.078 0.078 0.078 (1-t)*r_debt*D/V + k_equity*(1-D/V)
PV factor for FCFF 1.000 0.928 0.862 0.799 0.742 0.742 Discount each year at WACC
PV factor for FCFE 1.000 0.915 0.837 0.767 0.703 0.703 Discount each year at k_equity
Problem 18-16
Calculate the intrinsic value of Honda shares using the free cash flow model of Spreadsheet 18.2. Treat each scenario
independently.
a.Honda’s P/E ratio starting in 2016 will be 15. (Round your intrinsic value to the
nearest whole number and per share value to 2
decimal places.
LT Debt 30000 28500 27333 26167 25000
Working Capital
Data
div 1
g 0.25
t=0 price 9.042245
$2.13
a int value 11.17
b exp div y 0.112
c expected price 12.15
capital gain 0.0881
Problem 18-17
The Duo Growth Company just paid a dividend of $1 per share. The dividend is expected to grow at a rate of 25% per year for
the next 3 years and then to level off to 5% per year forever. You think the appropriate market capitalization rate is 20% per
year.
a.What is your estimate of the intrinsic value of a share of the stock? (Omit the “$” sign in your response. Round your answer
to 2 decimal places.)
after
g 0.05
mkt cap 0.2 0 1 2 3
Data
t 4
EPS 6.7
b 1
d 0
g 0.18
012345
Problem 18-18
The Generic Genetic (GG) Corporation pays no cash dividends currently and is not expected to for the next 4 years. Its latest EPS was
$5, all of which was reinvested in the company. The firm’s expected ROE for the next 4 years is 20% per year, during which time it is
expected to continue to reinvest all of its earnings. Starting in year 5, the firm’s ROE on new investments is expected to fall to 15% per
year. GG’s market capitalization rate is 15% per year.
a.What is your estimate of GG’s intrinsic value per share? (Omit the “$” sign in your response. Round your answer to 2 decimal
g 0.23
t 5
mkt cap 0.23
Data
CF 2 mil
g 0.05
EBIT 2.1
DEP 0.21
Problem 18-19
The MoMi Corporation’s cash flow from operations before interest and taxes was $2 million in the year just ended, and it expects that this will grow by
5% per year forever. To make this happen, the firm will have to invest an amount equal to 20% of pretax cash flow each year. The tax rate is 35%.
Depreciation was $200,000 in the year just ended and is expected to grow at the same rate as the operating cash flow. The appropriate market
capitalization rate for the unleveraged cash flow is 12% per year, and the firm currently has debt of $4 million outstanding.Use the free cash flow
approach to value the firm’s equity. (Omit the “$” sign in your response.)
Data
earnings 1
div 0.5 %
div 0.5 $
ROE 0.2
g 0.1
Problem 18-20
Chiptech, Inc., is an established computer chip firm with several profitable existing products as well as some promising new products in development. The
company earned $1 a share last year, and just paid out a dividend of $0.50 per share. Investors believe the company plans to maintain its dividend payout ratio
at 50%. ROE equals 20%. Everyone in the market expects this situation to persist indefinitely.
a.What is the market price of Chiptech stock? The required return for the computer chip industry is 15%, and the company has just gone ex-dividend (i.e., the
next dividend will be paid a year from now, at t= 1). (Omit the “$” sign in your response.)