Question

1) An analyst gathered the following financial information about a firm:

Estimated (next year’s) EPS                                       $10 per share

Dividend payout ratio                                                             40%

Required rate of return                                                           12%

Expected long-term growth rate of dividends                       5%

What is the analysts’ estimate of intrinsic value? Show work.

2) An analyst has made the following estimates for a stock:

dividends over the next year $.60

long-term growth rate                         13%

Intrinsic value                                     $24 per share

The current price of the shares is $22.

Assuming the stock price moves to intrinsic value over the next year, what is the expected return on the stock?

3) What would an investor be willing to pay for a share of preferred stock that pays $7 per share annual dividend if the yield on the preferred was 7.75%?

4) An analyst project that the stock will pay a $2 per share dividend at the end of next year and will sell for $40 at the end of next year. If the required rate of return is 15%, what is the value of the stock today?

5) A stock paid a $1.00 per share dividend last year. The risk-free rate is 5%; the expected return on the market is 12%; and the stocks beta is 1.5. Your forecast is for dividends to grow at 5% forever, what is the value of the stock?

6) Your forecast for a company is that it will pay dividends at the end of year one and two of $1.25 and $1.56 respectively. You expect dividends to grow at a 5% rate thereafter. The required return is 11%. What is the stocks’ intrinsic value?

7) The ABC Company will experience a 25% growth rate over the next three years and pay no dividends over that time. Growth will then fall the 6%, at which time the company will institute a 40% payout ratio. You expect the dividend in year four to be $2 per share. The required return is 10%, what is the firm’s intrinsic value today?

8) An investor is analyzing a firm that has a historical earnings retention rate of 60% and you forecast this retention rate to continue into the future. You believe that the firm can achieve a constant ROE of 15%. The stock’s beta is 1.2. The risk-free rate is 8% and the expected market return is 13%. If the investor thinks that next year’s earnings will be $3.00 per share, what is the stock’s intrinsic value?

9) A stock just paid a dividend of $1.00 per share. You expect the dividend for the next three years to grow at 30% per year, after which the dividend in the fourth year and all future years will grow at a rate consistent with and ROE of 10% and a dividend payout ratio of 60%. The required return is 14%. What is the intrinsic value of the stock?

10) ABC Company has 1.13 billion shares outstanding trading at a market price of $32 per share. The company’s book value of equity is $5.5 billion. The market value of outstanding debt is $2 billion and the book value of outstanding debt is $1.918 billion. The stock has a beta of 1.10. The company has a marginal tax rate of 35%. The company’s bonds are AAA rated and trade at a 1% yield spread to the government bond rate. The government bond rate is 6.25%. The equity risk premium is 5%. Calculate the company’s WACC.

11) An analyst tells you that he uses P/E multiples rather than a DCF valuation to value stocks. What type of valuation model is she using?