Topic G Exercises

The market consensus is that SuperSmart Corporation has ROE = 15% and a beta of 1.
2, and an expected earning

The market believes that Super Smart Corporation plans to maintain indefinitely its retention ratio (b) of 70%. Th
(a) Find the intrinsic value estimate of SuperSmart stock according to the constant growth DDM.
g = ROE * b
10.500%
12.600%
Constant Growth DDM
Vo = D1 / (k - g) $ 51.43
(b) Calculate the present value of growth opportunities.

NGV0=No Growth Component Value
PVGO = Vo - NGVo = D1 / (k - g) - E1 / k
NGVo = E1 / k PVGO
28.5714286 $ 22.86
George Johnson is preparing a valuation of Logistic Solutions, Inc. George has decided to use a two-stage DDM model and th
The Dividend per share is $2.60 for the current year (D0) and expected to grow at 15% annually for the first five years, and 8
Logistic Solutions’ estimated beta is 1.5, and George believes that the current market conditions dictate a 3.0% risk free rat
Beta 1.5 Required Rate of Return Estimate

Risk Free 3.0% k = rf + B *[E(rm) - rf ]
E(rm) -rf 7.00% 13.5%
Do 2.60
g1 15%
Time 5
g2 (after 5th year) 8%
Terminal Price
𝑃𝑇 = 𝐷𝑇+1 / 𝑘−𝑔2 102.68892695455
PV of Terminal Value 54.519
$ 68.04
Exercise Bicycle Company is expected to pay a dividend of $3.60 in year 1 , a dividend of $4.30 in year 2, and a dividend of $
An appropriate required return for the stock is 15%. The stock should be worth _______ today.
k 15%
g 9%
Dividends - Cash Flows PV of CF's Terminal Price Present Value

$ 3.60 $ 3.130 P3 = D4 / (k - g) $ 57.335
$ 4.30 $ 3.251 D3(1 + g)/(k - g)
$ 4.80 $ 3.156 $ 87.20
$ 9.538 SUM
Exercise #4 (slide 35)

Shiny Inc. had a FCFE of $600 Million in the most recent year and has 250 Million shares outstanding. Shiny’s required return
constant growth FCFE

K 12%
g 7%
FCFEo $600,000,000 / 250,000,000

$ 2.40
$ 51.36
National City Corporation, a bank holding company, reported earnings per share (E0) of $2.40 and paid dividends per share
The earnings were expected to grow 6% (g=6%) annually in the long term. The stock had a beta of 1.05. The risk free rate w
Dividend Payout Ratio 1 - b = Do / Eo Exp. Growth Rate 6%

44.17%
Cost of Equity
k = 𝑟𝑓 + 𝛽 × [𝐸 𝑟𝑚 − 𝑟𝑓] 12.4%
Justified Leading P/E. P0 /E1 =(1-b) / (k-g)

6.90
Justified Trailing P/E. P0 /E0 = [(1-b)(1+g)] / (k-g)

7.32
On March 11, 1994, the New York Stock Exchange Composite was trading at 16.9 times earnings, and the average dividend p
The risk free rate on March 11, 1994, was 6.95%, and the expected market risk premium was 5%. The economy was expecte
(a) Based upon these inputs, estimate the justified trailing P/E ratio for the exchange.
Dividend Payout Ratio: 1 - b (given) 42.25% Growth Rate 6%
Beta (NYSE - Market Portfolio) 1
Cost of Equity: K
k = 𝑟𝑓 + 𝛽 × [𝐸 𝑟𝑚 − 𝑟𝑓] 11.95%
Justified Trailing P/E. 7.5269

P0 / Eo
(1 - b)(1 + g)/ k - g
(b) What growth rate in dividends (or earnings) would justify the trailing P/E ratio of 16.9 on March 11, 1994?
(1 - b)(1 + g) 42.25%(1+g) 16.9
k-g 11.95% - g
(11.95% - g)16.9 42.25%(1 + g)

2.01955 2.01955 - 16.9g 42.25% + 42.25%g
1.59705 1.59705 17.3225g
17.3225 9.22%
If a business’s ROE is 15%, its required rate of return is 11%, and is expected to grow at a constant rate of 8% ann
ROE 15%
Required Required Of Return 11%
Expected Grow Constant Rate 8%
Po ROE - g
Bo K-g
2.33
.2, and an expected earnings per share (E1) of $3.6.
ention ratio (b) of 70%. The expected market return for the coming years is 11%, and risk free assets (10-year Treasury notes
nstant growth DDM.

D1 = E1 *(1-b)
1.08
two-stage DDM model and the following estimates.

y for the first five years, and 8% afterwards, indefinitely.
ns dictate a 3.0% risk free rate of return and a 7.0% market risk premium. According to the two-stage DDM model, the stock of Logistic
t D1 PV of Dt
1 2.990 2.634
2 3.439 2.669
3 3.954 2.704
4 4.547 2.740
5 5.230 2.776
in year 2, and a dividend of $4.80 in year 3. After year 3, dividends are expected to grow at the rate of 9% per year.
Present Value Value of Stock

$ 66.87
nding. Shiny’s required return on equity is 12%, and WACC is 10%. If Shiny’s FCFE is expected to grow at a constant rate of 7%, its intrin
and paid dividends per share of $1.06 (D0) in the most recent year.
a of 1.05. The risk free rate was 4% and the expected market return was 12%. Estimate the justified leading and trailing P/E ratio for Na
gs, and the average dividend payout ratio across stocks on the exchange was 42.25%.
%. The economy was expected to grow 6% a year, in nominal terms, in the long term.
March 11, 1994?

at a constant rate of 8% annually, what is its justified P/B ratio based on fundamentals?
sets (10-year Treasury notes) are yielding 3%.
M model, the stock of Logistic Solutions should be worth _______ today.

constant rate of 7%, its intrinsic value per share is ___
ng and trailing P/E ratio for National City Corporation.

Topic G Exercises

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The market consensus is that SuperSmart Corporation has ROE = 15% and a beta of 1.

2, and an expected earning

(b) Calculate the present value of growth opportunities.

Beta 1.5 Required Rate of Return Estimate

Dividends - Cash Flows PV of CF's Terminal Price Present Value

Exercise #4 (slide 35)

constant growth FCFE

FCFEo $600,000,000 / 250,000,000

Dividend Payout Ratio 1 - b = Do / Eo Exp. Growth Rate 6%

Justified Leading P/E. P0 /E1 =(1-b) / (k-g)

Justified Trailing P/E. P0 /E0 = [(1-b)(1+g)] / (k-g)

Justified Trailing P/E. 7.5269

(11.95% - g)16.9 42.25%(1 + g)

nstant growth DDM.

two-stage DDM model and the following estimates.

Present Value Value of Stock

March 11, 1994?

M model, the stock of Logistic Solutions should be worth _______ today.

ng and trailing P/E ratio for National City Corporation.

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