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    Chapter 9

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    mahnoor javaid
    The document contains 6 problems related to valuation of stocks and preferred shares. Problem 1 values a stock using the constant growth model given the expected dividend, growth rate, and required rate of return. Problem 2 calculates the expected future stock price and required rate of return for a stock paying a growing dividend. Problem 3 describes calculating a firm's intrinsic value using the two-stage dividend discount model. Problem 4 values a firm's stock per share given cash flow projections and WACC. Problem 5 calculates the required rate of return on perpetual preferred stock that pays a fixed annual dividend.

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    Chapter 9

    Uploaded by

    mahnoor javaid
    168 views2 pages
    The document contains 6 problems related to valuation of stocks and preferred shares. Problem 1 values a stock using the constant growth model given the expected dividend, growth rate, and required rate of return. Problem 2 calculates the expected future stock price and required rate of return for a stock paying a growing dividend. Problem 3 describes calculating a firm's intrinsic value using the two-stage dividend discount model. Problem 4 values a firm's stock per share given cash flow projections and WACC. Problem 5 calculates the required rate of return on perpetual preferred stock that pays a fixed annual dividend.

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    The document contains 6 problems related to valuation of stocks and preferred shares. Problem 1 values a stock using the constant growth model given the expected dividend, growth rate, and required rate of return. Problem 2 calculates the expected future stock price and required rate of return for a stock paying a growing dividend. Problem 3 describes calculating a firm's intrinsic value using the two-stage dividend discount model. Problem 4 values a firm's stock per share given cash flow projections and WACC. Problem 5 calculates the required rate of return on perpetual preferred stock that pays a fixed annual dividend.

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    168 views2 pages

    Chapter 9

    Uploaded by

    mahnoor javaid
    The document contains 6 problems related to valuation of stocks and preferred shares. Problem 1 values a stock using the constant growth model given the expected dividend, growth rate, and required rate of return. Problem 2 calculates the expected future stock price and required rate of return for a stock paying a growing dividend. Problem 3 describes calculating a firm's intrinsic value using the two-stage dividend discount model. Problem 4 values a firm's stock per share given cash flow projections and WACC. Problem 5 calculates the required rate of return on perpetual preferred stock that pays a fixed annual dividend.

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    HW CH 9

    9-2 Thomas Brothers is expected to pay a $0.50 per share dividend at the end of the year
    (that is D1= $0.50) The dividend is expected to grow at a constant rate of %7 a year. The
    required rate of return on the stock, Rs is 15%. What is the stock's current value per share? 

    P = D/(k-g) 

    P is the price of the stock 


    D is the dividend 
    k is the required rate of return 
    g is the growth rate (g < k) 

    P = 0.50/(15% - 7%) 
    P = 0.50/(0.15 - 0.07) 
    P = 0.50/0.08 
    P = $6.25 

    9-3 CONSTANT GROWTH VALUATION Harrison Clothiers’ stock currently sells for $20 00
    ashare. It just paid a dividend of $1.00 a share (that is, D0 $1.00). The dividend is expectedto
    grow at a constant rate of 6% a year. What stock price is expected 1 year from now? Whatis
    the required rate of return?

    Price expected 1 year from now=p0*(1+6%)=20*1.06=$21.2

    D1=D0*(1+g)=1*1.06=$1.06

    Rs=(D1/p0)+g=(1.06/20)+6%=11.3%

    9-4 Hart Enterprises recently paid a dividend, D 0 of $1.25. It expects to have non-constant
    growth of 20 percent for 2 years followed by a constant rate of 5percent thereafter. T he
    firm’s required return is 10 percent

    a) How far away is the terminal, or horizon, date?


    T he terminal, or horizon, date is the date when the growth ratebecomes constant. T his
    occurs at the end of Year 2.
    b) What is the firm’s horizon, or terminal, value?

    c) What is the firms intrinsic value today, P0 ?

    The firms intrinsic value is calculated as the sum of the present value of all dividends
    during the supernormal growth period plus the present value of the terminal value.
    Using your financial calculator, enter the following inputs: CF 0 = 0, CF 1 = 1.50, CF 2 =
    1.80 + 37.80 = 39.60, I/YR= 10, and then solve for NPV = $34.09

    9-5 Smith Technologies is expected to generate $50 million in free cash flow next year, and
    FCF is expected to grow at a constant rate of 3% per year indefinitely. Smith has no debt or
    preferred stock, and its WACC is 11%. If Smith has 50 million shares of stock outstanding,
    what is the stock's value per share?

    The firm’s free cash flows is expected to grow at a constant rate, hence we can apply a constant
    formula to determine the total value of the firm:

    Firm value = FCF1/(WACC – g)

    Firm value = $150,000,000/(0.10 – 0.05)

    Firm value = $3,000,000,000

    The stock’s value per share is:

    Equity value per share = Equity Value/ Shares Outstanding

    Equity value per share = $3,000,000,000/50,000,000

    Equity value per share = $60

    9-6 PREFERRED STOCK VALUATION Fee Founders has perpetual preferred stock
    outstandingthat sells for $60 a share and pays a dividend of $5 at the end of each year. What
    is therequired rate of return?

    Rp=Dp/Vp=5/60=8.33%

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