FE_Assignment_2_A(1).pdf

# FE_Assignment_2_A(1).pdf - Assignment 2 Stock Valuation and...

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Assignment 2: Stock Valuation and Corporate investment Decisioning This homework is due Fri., 2/22/19 by 5 pm. Make sure to show all your work. Important: You can work with partners to complete this assignment if you wish. That will be true for the remainder of the course. 1. 5 pts . Suppose an all-equity firm has \$1m in book assets to start. Expected ROAs are 2% in year 1, 3% in year 2, and 4% thereafter. The number of shares in the firm is 1000. Assume that the dividend payout rate is .5. Also assume that depreciation and taxes are \$0. See the attached spreadsheet for answers. a. Fill in the following table. Year 1 2 3 4 5 Total Assets @ start of period 1,000,000 \$ 1,010,000 \$ 1,025,150 \$ 1,045,653 \$ 1,066,566 Net Income \$ 20,000 \$ 30,300 \$ 41,006 \$ 41,826 \$ 42,663 Dividends \$ 10,000 \$ 15,150 \$ 20,503 \$ 20,913 \$ 21,331 ROA .02 .03 .04 .04 .04 Investment \$ 10,000 \$ 15,150 \$ 20,503 \$ 20,913 \$ 21,331 Total Assets @ end of period \$ 1,010,000 \$ 1,025,150 \$ 1,045,653 \$ 1,066,566 \$ 1,087,897 EPS \$ 20.00 \$ 30.30 \$ 41.01 \$ 41.83 \$ 42.66 DIV per Share \$ 10.00 \$ 15.15 \$ 20.50 \$ 20.91 \$ 21.33 b. Assuming that the discount rate = 7%. What is the price per share (P) today and expected EPS for year 1. P(0) = DIV(1)/(1+r) + DIV(2)/(1+r)^2 + DIV(3)/(r-ROA*d)^3*1/(1+r)^3 = \$10.00/(1.07) +\$15.15/(1.07)^2 + \$20.50/(.07-.04*.5)*1/(1.07)^2 = 22.58 + 358.11 = \$380.68 EPS(1) = \$20.00, right from the table.

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