Question

2. El Lilly (LY): The following company. The following table contains historical dividends and free cash flows for the CAPM Model: The stock hetais 16 Use beta to calculate the rate or Tree rate is 1.75% and the market risk premium is 7% 16. Use beta to calculate the rate of return. Assume the risk ividend Model: Calculate the who didends and the average growth in dividends. this as you as your estimate of future dividend growth. Use 2018 dividend as De Use stockholder rate of return (r) estimate. Calculate the value of the stock FCF Model: For FCF, calculate the time value of the rate for 2014-2018, (solving for using PV and FV). This estimate is not providing an annorlate estimation of future growth, so use 3% as your assumption. Use a WACC of 5 as your discount rate. Use the average of an FCFS from 2014-2018 as your FCF The debt for this comparw is $16.432 SM and the number of shares is 915.4M. Find the value of one share of stock. Calculate rs = (D1/PO)+g: The current stock price is $107.09. Use this stock price to calculate your expected rate of return using the dividend model assumptions. LLY 2014 2015 2016 2017 2018 Div FCF 1.96 1,634.3 2.00 2,974.6 2.04 2,966.6 2.082,406.7 2.25 1,591.3

Answer 1

2] Eli Lilly

CAPM Model

expected return = risk free rate + (beta * market risk premium)

expected return = 1.75% + (0.16 * 7%) = 2.87%.

Dividend Model

value of share = D₁ / (r - g), where

D₁ = dividend in 2019

r = required return

g = growth rate of dividend.

The dividend grew from $1.96 to $2.25 between 2014 to 2018 (4 years).

FV = PV * (1 + I)⁴, where I is the growth rate (g).

$2.25 = $1.96 * (1 + g)⁴

g = ($2.25 / $1.96)^1/4 - 1

g = 3.51%.

Dividend in 2019 = dividend in 2018 * (1 + g)

Dividend in 2019 = $2.25 * (1 + 3.51%) = $2.33.

Value of share =  D₁ / (r - g)

Value of share = $2.33 / (6% - 3.51%)

Value of share = $93.53.

FCF Model

g is calculated to 3.51% between 2014 to 2018 in the previous part.

Value of share = (Equity value / number of shares)

Equity value = firm value - debt.

firm value = FCF₁ / (WACC - g).

FCF₀ = (1634.3 + 2974.6 + 2966.6 + 2406.7 + 1591.3) / 5 = 2314.70.

FCF₁ =FCF₀ * (1 + g)

FCF₁ = 2314.70 * (1 + 3%) = 2384.14

firm value = FCF₁ / (WACC - g).

firm value =   2384.14 / (5% - 3%)

firm value = 119,207.05.

equity value = firm value - debt.

equity value =  119,207.05 - 16,432.50 = 102,774.55.

Value of share = (Equity value / number of shares)

Value of share = (102,774.55 / 915.4)  

Value of share = $112.27.

Calculate rs

rs = (D₁ / P₀) + g

Dividend in 2019 = $2.25 * (1 + 3.51%) = $2.33.

rs = ($2.33 / $107.09) + 3.51%

rs = 5.69%