# final spreadsheet

Post on 27-Nov-2014

133 views

Embed Size (px)

TRANSCRIPT

FIN 5080 - Jack De Jong:Chapter 7:Stocks, Stock VaIuation, and Stock Market EquiIibriumExampIe 1: What is the value of a preferred stock where the dividend rate is 16% on a $100 par value?The required rate of return for a stock of this risk level is 12%.Dividend Amount = $16.00Required Rate of Return = 12.00%VaIue of Preferred Stock = $133.33ExampIe 2: You own 250 shares of McCormick Resources preferred stock, which currently sells for$38.50 per share and pays annual dividends of $3.25 per share.a.What is your expected return?8.44%b.f you require an 8% return, given the current price, should you sell or buy more?$40.63ExampIe 3: Gilliland Motor, nc. paid a $3.75 dividend last year.At a constant rate of growth of 6%, what is the value of the common stock if investors require a 20% return?Most recently paid dividend = $3.7500Required rate of return = 20.00%Growth rate =6.00%Next expected dividend = $3.9750VaIue of Common Stock = $28.3929What will be the dividend yield and capital gains yield for the next year?Dividend expected for year 2 = $4.2135Expected price at end of year 1 = $30.0964Dividend Yield = Dividend 1/Price 0 = 14.00%Capital Gains Yield = (Price 1 - Price 0)/Price 0 = 6.00%ExampIe 4: The common stock of KPD paid $1 in dividends last year.Dividends are expected to grow at an 8% annual rate for an indefinite number of years. a.f KPD's current market price is $25, what is the stock's expected rate of return? b.f your required rate of return is 11%, what is the value of the stock for you? c.Should you make the investment? Most recently paid dividend = $1.0000Growth rate =8.00%Next expected dividend = $1.0800Current market price = $25.00Dividend Yield = D1/P0 = 4.32%Capital Gains Yield = g = 8.00%Expected Return on KPD = 12.32%ExampIe 5: Axel Co. had earnings per share of $5.00 five years ago.This year their EPS was $10.00.They expect their growth to continue as before.What will their growth rate be? N 5PV -$5.00PMT $0.00FV $10.00Type 0 I = g 14.87%Problem 7-18: Reizenstein Trucking (RT) has just developed a solar panel capable of generating 200%more electricity than any solar panel currently on the market.As a result, RT is expected to experience a 15% annual growth rate for the next 5 years.By the end of5 years, other firms will have developed comparable technology, and RT's growth ratewill slow to 5% per year indefinitely.Stockholders require a return of 12% on RT's stock.The most recent annual dividend, D0, which was paid yesterday, was $1.75per share.What's the value of the stock today?Year Growth Rate Dividend Cash FIows0 $1.75001 15.00% $2.0125 $2.01252 15.00% $2.3144 $2.3144nn22n1i11iip b w bwb w bwb cccc pspspsrDV StockPreIerred oI Value $38.50$3.25 PDr` Return oI Rate Expected0psps .08$3.25 rDV StockPreIerred oI Valuepspsps g r and rate growth expected g whereg - rg 1 D g - rDP`ss0s10 c gPDr` Return oI Rate Expected01s

3 15.00% $2.6615 $2.66154 15.00% $3.0608 $3.06085 15.00% $3.5199 $56.31806 5.00% $3.6959Required Rate of Return on RT = 12.00%Price at End of Year 5 = D6/(rs - g) = $52.7981Find Price Today using NPV: 12.00%NPV $39.44VoIatiIity ExampIe:Next expected dividend = $2.00Growth Rate = 5.00%Required rate of return = 10.00%VaIue of Common Stock = $40.00Required Rate Growth Ratesof Return 4.00% 5.00% 6.00%9.00% $40.00 $50.00 $66.6710.00% $33.33 $40.00 $50.0011.00% $28.57 $33.33 $40.00g - rDP`s10

FIN 5080 - Jack De Jong:Chapter 7:Stocks, Stock VaIuation, and Stock Market EquiIibriumMB8:ProbIem 7-5:CAPM:Year Growth Rate Dividend Cash FIows0 $2.00001 20.00% $2.4000 $2.40002 20.00% $2.8800 $61.02343 7.00% $3.0816Risk-free rate 730Market risk prem. 400Beta 12000RRR on Stock 1230P2 = D3/(rs - g) 381434 $ P0 hat = NPV 50.5250 $Year Growth Rate Dividend Cash FIows0 20000 $ 1 20.00% 24000 $24000 $ 2 20.00% 28800 $28800 $ 3 7.00% 30816 $632930 $ 4 700 32973 $ Risk-free rate 730Market risk prem. 400Beta 12000RRR on Stock 1230P3 = D4/(rs - g) 622134 $ P0 = NPV 50.5250 $ProbIem 7-15:Part a:RRR = 1300D0 = 200 $Growth Rates P0 Hat300 .50 $ Part a000 13.33 $300 21.00 $1000 44.00 $1300 #DIV/0! Part b2000 (48.00) $ Part c: NO, because g > RRR is not sustainabIe.ProbIem 7-12:Year Growth Rate Dividend Cash FIows0 $1 $ $2 $ $3 10000 $10000 $ 4 3000 13000 $13000 $ 5 3000 22300 $369643 $ 6 800 24300 $ RRR = 1300P5 = D6/(rs - g) 3471 $P0 = NPV 1.8 $ 2631 $rong answer if do not include the $0 g - rDP wherer 1P r 1D r 1D r 1DP`s1 NNNsNNsN2s21s10

### - #P r - r - r r r c c g r and rate growth expected g whereg - rg 1 D g - rDP`ss0s10 c g - rDP wherer 1P r 1D r 1D r 1DP`s1 NNNsNNsN2s21s10

dividends in years 1 and 2.ProbIem 7-11:RRR = 13.00%Year Growth Rate Dividend Cash FIows0 $1.00001 50.00% $1.5000 $1.50002 25.00% $1.8750 $30.26793 6.00% $1.9875P2 = D3/(rs - g) = P0 Hat = NPV 25.0316 $gPDr` #eturn oI #ate Expected01s

FIN 5080-Jack De Jong:Chapter 7:Stocks, Stock VaIuation, and Stock Market EquiIibriumQuiz #11:May 12, 20111. C Molen nc. has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share.t is selling in the marketplace for $117.25 and your required rate of return on this preferred stock is 6.5%.Which of the following statements is true?Annual dividend of preferred = 7.50 $ Required rate of return on P/S = 6.50%Current market price of P/S = 117.25 $ ntrinsic Value of P/S =115.38 $ Expected rate of return on P/S = 6.40%MoIen's P/S is overvaIued, so you wouId seII it if you owned it.2. B Schnusenberg Corporation just paid a dividend of $0.75 per share, and thatdividend is expected to grow at a constant rate of 6.50% per year in the future.The company's beta is 1.25, the required return on the market is 10.50%, and the riskfree rate is 4.50%.What is the intrinsic value of the company's stock? CAPM:D0 = 0.7500 $ g = 6.50%D1 = 0.7988 $ Risk-free rate = 4.50%Market required rate = 10.50%Schnusenberg's beta = 1.25Schnusenberg's RRR = 12.00%Schnusenberg's Intrinsic VaIue = P0 hat = 14.52 $ pspspsrDV StockPreIerred oI Value0pspsPDr` Return oI Rate Expected i M RF i RF M RF ib RP r b r - r r r c c g r and rate growth expected g whereg - rg 1 D g - rDP`ss0s10 c FIN 5080-Jack De Jong:Chapter 7:Stocks, Stock VaIuation, and Stock Market EquiIibriumQuiz #12:May 17, 20111. E A stock just paid a dividend of $1.75 per share, has a constant growth rate of 3.6%, and is currently selling for $32.00 per share.What is the stock's expected total return for the upcoming year?D0 =1.7500 $g = 3.60%D1 = 1.8130 $P0 = 32.0000 $ Dividend Yield = 5.67%Capital Gains Yield = 3.60%Expected rate of return = 9.27%2. A Ackert Company's last dividend was $1.55.The dividend growth rate isexpected to be constant at 1.5% for the next two years, after which the dividends areexpected to grow at a rate of 8% forever.The firm's required rate of return is 12%.What is the intrinsic value of the company's stock? Year Growth Rate Dividend Cash FIows0 1.5500 $ 1 1.50% 1.5733 $1.5733 $ 2 1.50% 1.5968 $44.7118 $ 3 8.00% 1.7246 $ RRR on Ackert = 12.00%P2 = D3/(rs - g) = 43.1149 $ Find Price Today = NPV: 12.00%NPV 37.0486 $ Other Calculations:P3=P2*(1+g) 46.5641 $ P1=NPV 39.9212 $ Year 1: Dividend Yield = 4.25%Capital Gains Yield = (P1 - P0)/P0 = 7.75%Total Expected Return in Year 1 = 12.00%gPDr` Return oI Rate Expected01s

g - rDP wherer 1P r 1D r 1D r 1DP`s1 NN NsNNsN2s21s10

FIN 5080 - Jack De Jong:Chapter 9:The Cost of CapitaIExampIe 1: f we were to get our capital through a bank note where the interest rate is 11% and our marginal tax rate is 34%, what would be the cost of our loan?Before-tax Cost of Note =- 11.00%Marginal Tax Rate = 40.00%After-tax Cost of Debt = 6.60%ProbIem 9-9: A company's 6% coupon rate, semiannual payment, $1,000 par value bond that maturesin 30 years sells at a price of $515.16.The company's federalplusstate tax rate is 40%.What is the firm's component cost of debt for purposes of calculating the WACC?Find YTM and then adjust for taxes:N 60PV ($515.16)PMT $30.00FV $1,000.00Type 0 = YTM 6.00%6 Month YTM = 6.00%Nominal Annual YTM = 12.00%Marginal Tax Rate = 40.00%After-tax Cost of Debt = 7.20%What if 2% fIotation costs were expected on issuing new bonds?Marginal Tax Rate = 40.00%Flotation Costs as a % = 2.00%N 60PV ($504.86)PMT $30.00FV $1,000.00Type 0 6.12%6 Month Before-tax Cost of Debt = 6.12%Annual Before-tax Cost of Debt = 12.23%After-tax Cost of Debt = 7.34%What happens if the tax rate decreases to 25%?Marginal Tax Rate = 25.00%Flotation Costs as a % = 2.00%After-tax Cost of Debt = 12.23%*(1-.25)= 9.18%ProbIem 9-17(2): T's perpetual preferred stock has a $100 par value, pays a quarterly dividend of $2, and has a yield to investors of 11%.New perpetual preferred stock would have to provide the same yield to investors, and the company would incur a 5% flotation cost to sell it.What is the component cost of preferred stock for purposes of calculating the WACC? Quarterly Preferred Dividend = $2.00Annual Preferred Dividend = $8.00Yield on Preferred Stock = 11.00%Market Price of Preferred Stock = $72.73Percentage Flotation Costs = 5.00%Comp. Cost of Preferred Stock = 11.58%ProbIem 9-17(5): Betas, as reported by security analysts, range from 1.3 to 1.7; the Tbond rate is 10%; and the market risk premium is estimated by various brokerage houses to be in the range of 4.5% to 5.5%.What is the component cost of retained earnings? nn22n1i11iip b w bwb w bwb cccc % - 1 r DebtoI Costtax- AIterdc pspspspspspsr`DPPDr` Return oI Rate ExpectedF - 1 PDrpspspsc

i M RF i RF M RF sb RP r b r - r r r c c% - 1 r DebtoI Costtax- AIterdc 2Nd2N1 ttdB2r1M 2r12IN%F - 1 V

c

owest Midpoint HighestRisk-free Rate 10.00% 10.00% 10.00%Market Risk Prem. 4.50% 5.00% 5.50%T's Beta 1.30 1.50 1.70Cost of Equity = 15.85% 17.50% 19.35%ProbIem 9-17(4): The company has 4 million shares of common stock outstanding.The stock's price = $20, but the stock has recently traded in the range of $17 to $23.The most recently paid dividend wa