P 7-15 Common Stock Value: All Growth Models

P 7-15 Common stock value: All growth models
You are evaluating the potential purchase of a small business currently generating $42,500 of
after-tax cash flow (D0 = $42,500). On the basis of a review of similar-risk investment
opportunities, you must earn an 18% rate of return on the proposed purchase. Because you are
relatively uncertain about future cash flows, you decide to estimate the firm’s value using
several possible assumptions about the growth rate of cash flows.
a. What is the firm’s value if cash flows are expected to grow at an annual rate of 0% from
now to infinity?
Jawab :
a. Po = D1/ rs
D1 = D0 x (1 + g)
D1 = $ 42,500 x ( 1 + 0%)
D1 = $ 42,500
Po = $ 42,500 / 18%
Po = $ 236,111.11
P 7-9 Common stock valuation: Constant growth
Sweet Candy will pay a dividend of $0.72 next year. The CEO of the company declared that the
company will maintain a constant growth rate of 7% per year every year from now on.
a. How much will you pay for the stock if your required return is 10%?
b. How much will you pay for the stock if your required return is 8%?
c. Based on your answer in parts a and b, give one disadvantage of the constant growth
model.
Jawab :
Dik :
D1 = $0,72
g = 7%
rs Po = D1 / (rs - g) Share Price

Po = $ 0,72 / (10% -
10% 7%) $24,00
8% Po = $ 0,72 / (8% - 7%) $72,00
a. Jumlah saham yang akan saya bayar dengan required returnnya 10% adalah $ 24
b. Jumlah saham yang akan saya bayar dengan required returnnya 80% adalah $ 72
c. Constant growth model sensitif terhadap required return dan growth rate. Walaupun disoal a
terdapat perbedaan kecil antara required return dengan growth ratenya yaitu 3% namun akan
menghasilkan perbedaan yang cukup besar (3 kali lebih kecil daripada selisih 1% yang ada di
soal b) pada share price
P7–13 Common stock value: Variable growth
Home Place Hotels, Inc., is entering into a 3-year remodeling and expansion project. The
construction will have a limiting effect on earnings during that time, but when it is complete, it
should allow the company to enjoy much improved growth in earnings and dividends. Last year,
the company paid a dividend of $3.40. It expects zero growth in the next year. In years 2 and 3,
5% growth is expected, and in year 4, 15% growth. In year 5 and thereafter, growth should be a
constant 10% per year. What is the maximum price per share that an investor who requires a
return of 14% should pay for Home Place Hotels common stock?
Jawab :
P0 = PV dividends during initial growth period / PV of price of stock at the end of growth period
Step 1 Find the value of the cash dividends at the end of each year
D =D x (1+g)t
t 0
Dividends D0 g Dt =D0 x (1+g1)^t

1 $3,40 0% $3,40
2 $3,40 5% $3,57
3 $3,57 5% $3,75
4 $3,75 15% $4,31
5 $4,31 10% $4,74
Step 2 Find the present value of the dividends expected during the initial growth period
t Dt (1 + 14% )^t PV of Dividends

(1) (2) (3) [(2) : (3)]
1 $3,40 1,14 $2,98
2 $3,57 1,30 $2,75
3 $3,75 1,48 $2,53
4 $4,31 1,69 $2,55
$10,81
Step 3 Find the present value of price of stock at end of initial growth period
Pn = ( DN+1 ) / (rs – g)
P4 = ( D5 / (rs - g) )
P4 = ( $4,74 / (14% - 10%))
P4 = $ 118,50
PV = $118,50 / (1 + 14%)^4
PV = $ 70,16
Step 4 Add the present value components found in Steps 2 and 3 to find the value of the
stock
P0 = $10,81 + $70,16 = $80,97
Jadi, harga maksimum per saham yang harus dibayar investor dengan required return sebesar
14% untuk saham biasa Home Place Hotels adalah $80,97
P 7-17 Using the free cash flow valuation model to price an IPO
Assume that you have an opportunity to buy the stock of CoolTech, Inc., an IPO being offered
for $12.50 per share. Although you are very much interested in owning the company, you are
con- cerned about whether it is fairly priced. To determine the value of the shares, you have
decided to apply the free cash flow valuation model to the firm’s financial data that you’ve
developed from a variety of data sources. The key values you have com- piled are summarized in
the following table.
a. Use the free cash flow valuation model to estimate CoolTech’s common stock value per share.
b. Judging on the basis of your finding in part a and the stock’s offering price, should you buy
the stock?
c. On further analysis, you find that the growth rate in FCF beyond 2019 will be 3% rather than
2%. What effect would this finding have on your responses in parts a and b?
Jawab :
a.
Step 1 : Calculate the PV of FCF from 2016 to infinity
Value of 2020-> ∞ = FCF2019 / ra - gFCF
FCF 2020-> ∞ = ($ 1,100,000 x (1+0.02)) / (0.08 – 0.02) = $ 18,700,000

Note that to calculate the FCF in 2020, we had to increase the 20219 FCF value of $1,100,000 by
the 2% FCF growth rate, gFCF.
Step 2 : Add the PV of the cash flow obtained in (1) to the cash flow for 2019
Total FCF2019 = $1,100,000 + $18,700,000 = $19,800,000
Step 3 : Find the PV of the cash flows for 2016 through 2019.
PVIF = 1 / (1 + ra)^t
FCFt PVIF8%,n Present value of FCFt

Year (t)
(1) (2) [(1) x (2)]
$
2016 $ 700.000,00 0,926 648.200,00
$
2017 $ 800.000,00 0,857 685.600,00
$
2018 $ 950.000,00 0,794 754.300,00
$
2019 $ 19.800.000,00 0,735 14.553.000,00
$
Value of entire company, Vc 16.641.100,00
Step 4 : Calculate the value of the common stock
Vs = Vc – Vd – Vp
Vs = $ 16,641,100 - $2,700,000 - $1,000,000
Vs = $ 12,941,100
Value per share = $ 12,941,100 / 1,100,000 = $11.765
b. Dengan menggunakan analisis diatas, harga IPO dari saham tsb bernilai overvalued sebesar
$0.73 ($12.50 - $ 11.77) sehingga sebaiknya kita tidak membeli saham tsb
c.
Step 1 : Calculate the PV of FCF from 2020 to infinity
FCF2020-> ∞ = $1,100,000 ( 1 + 0.03) / (0.08 – 0.03) = $22,660,000
Step 2 : Add the PV of the cash flow obtained in (1) to the cash flow for 2018
FCF2019 = $22,660,000 + $1,100,000 = $23,760,000
Step 3 : Find the PV of the cash flows for 2016 through 2019
FCFt PVIF8%,n Present value of FCFt

Year (t)
(1) (2) [(1) x (2)]
$ $
2016 700.000,00 0,926 648.200,00
$ $
2017 800.000,00 0,857 685.600,00
$ $
2018 950.000,00 0,794 754.300,00
$ $
2019 23.760.000,00 0,735 17.463.600,00
$
Value of entire company, Vc 19.551.700,00
Step 4 : Calculate the value of the common stock
Vs = Vc – Vd – Vp
Vs = $19,551,700 - $2,700,000 - $1,000,000 = $15,851,700
Value per share = $ 15,851,700 / 1,100,000 = $14.41
Jika growth rate diubah menjadi 3%, harga IPO saham tersebut undervalued sebesar $ 1.91 ($
14.41 - $ 12.50) sehingga kita harus membeli saham tersebut.
P 7-18 Book and liquidation value
The balance sheet for Gallinas Industries is as follows.

Given this information, answer the following:
a. What is Gallinas Industries’ book value per share?
b. What is its liquidation value per share?
c. Compare, contrast, and discuss the values found in parts a and b.
Jawab :
a. Book value per share = (Book value of assets – (liabilities + preferred stock at book value) /
number of shares outstanding
Book value per share = ($780,000 - $420,000) / 10,000 = $36 per share
b.
Liquidation value of
Cash $ 40.000 assets $ 722.000
Marketable securities $ 60.000 Less : Current liabilities $ (160.000)
Account receivable (90% x
BV) $ 108.000 Long term debt $ (180.000)
Inventories (90% x BV) $ 144.000 Preferred stock $ (80.000)
Land and buildings net Available for common
(130% x BV) $ 195.000 stock $ 302.000
Machinery and equipment
(70% x BV) $ 175.000
Liquidation value of assets $ 722.000
Liquidation value per share = Available for common stocks / number of share outstanding
Liquidation value per share = $302,000 / 10,000 = $30.20 per share
c. Liquidation value pada perhitungan diatas yaitu di bawah book value per share dan mewakili
nilai minimum perusahaan. Terdapat kemungkinan liquidation value lebih besar dari book value
jika asetnya undervalued. Umumnya, mereka bernilai overvalued karena berdasarkan book
value, seperti pada soal diatas.
P7–19 Valuation with price/earnings multiples

For each of the firms shown in the following table, use the data given to estimate its common
stock value employing price/ earnings (P/E) multiples.
Jawab :
Firm EPS x P/E Stock Price
$
A $ 3.00 x 6.0 18,60
$
B $ 4.50 x 10.0 45,00
$
C $ 1.80 x 12.6 22,68
$
D $ 2.40 x 8.9 21,36
$
E $ 5.1 x 15 76,50

P 7-15 Common Stock Value: All Growth Models

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P 7-15 Common stock value: All growth models

P 7-9 Common stock valuation: Constant growth

rs Po = D1 / (rs - g) Share Price

8% Po = $ 0,72 / (8% - 7%) $72,00

P7–13 Common stock value: Variable growth

Dividends D0 g Dt =D0 x (1+g1)^t

t Dt (1 + 14% )^t PV of Dividends

P4 = ( $4,74 / (14% - 10%))

Value of 2020-> ∞ = FCF2019 / ra - gFCF

FCF 2020-> ∞ = ($ 1,100,000 x (1+0.02)) / (0.08 – 0.02) = $ 18,700,000

Total FCF2019 = $1,100,000 + $18,700,000 = $19,800,000

FCFt PVIF8%,n Present value of FCFt

Step 4 : Calculate the value of the common stock

Vs = $ 16,641,100 - $2,700,000 - $1,000,000

Value per share = $ 12,941,100 / 1,100,000 = $11.765

Step 1 : Calculate the PV of FCF from 2020 to infinity

FCF2020-> ∞ = $1,100,000 ( 1 + 0.03) / (0.08 – 0.03) = $22,660,000

FCFt PVIF8%,n Present value of FCFt

Step 4 : Calculate the value of the common stock

Vs = $19,551,700 - $2,700,000 - $1,000,000 = $15,851,700

Value per share = $ 15,851,700 / 1,100,000 = $14.41

P 7-18 Book and liquidation value

The balance sheet for Gallinas Industries is as follows.

a. What is Gallinas Industries’ book value per share?

b. What is its liquidation value per share?

c. Compare, contrast, and discuss the values found in parts a and b.

Liquidation value per share = $302,000 / 10,000 = $30.20 per share

P7–19 Valuation with price/earnings multiples

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