05 -- Stock Valuation

05 -- Stock Valuation - StocksandTheirValuation

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Chapter 9 Stocks and Their Valuation Solutions to End-of-Chapter Problems 9-1 D 0  = $1.50; g 1-3  = 7%; g n  = 5%; D 1  through D 5  = ? D 1  = D 0 (1 + g 1 ) = $1.50(1.07) = $1.6050. D 2  = D 0 (1 + g 1 )(1 + g 2 ) = $1.50(1.07) 2  = $1.7174. D 3  = D 0 (1 + g 1 )(1 + g 2 )(1 + g 3 ) = $1.50(1.07) 3  = $1.8376. D 4  = D 0 (1 + g 1 )(1 + g 2 )(1 + g 3 )(1 + g n ) = $1.50(1.07) 3 (1.05) = $1.9294. D 5  = D 0 (1 + g 1 )(1 + g 2 )(1 + g 3 )(1 + g n ) 2  = $1.50(1.07) 3 (1.05) 2  = $2.0259. 9-2 D 1  = $0.50; g = 7%; r s  = 15%;   0 P ˆ   = ? . 25 . 6 $ 07 . 0 15 . 0 50 . 0 $ g r D P ˆ s 1 0 = - = - = 9-3 P 0  = $20; D 0  = $1.00; g = 6%;  1 P ˆ  = ?; r s  = ? 1 P ˆ   = P 0 (1 + g) = $20(1.06) = $21.20. s r ˆ 0 1 P D  + g =  20 $ ) 06 . 1 ( 00 . 1 $  + 0.06 20 $ 06 . 1 $  + 0.06 = 11.30%.  r s  = 11.30%. 9-4 a. The terminal, or horizon, date is the date when the growth rate becomes constant.  This occurs  at the end of Year 2. b. 0 1 2 3 Appendix 9A:  Stock Market Equilibrium Answers and Solutions 1 r s  = 10%
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| | | | 1.25 1.50 1.80 1.89 37.80 =  05 . 0 10 . 0 89 . 1 - The horizon, or terminal, value is the value at the horizon date of all dividends expected  thereafter.  In this problem it is calculated as follows: . 80 . 37 $ 05 . 0 10 . 0 ) 05 . 1 ( 80 . 1 $   = - c. The firm’s intrinsic value is calculated as the sum of the present value of all dividends during the  supernormal growth period plus the present value of the terminal value.  Using your financial  calculator, enter the following inputs:  CF 0  = 0, CF 1  = 1.50, CF 2  = 1.80 + 37.80 = 39.60, I/YR =  10, and then solve for NPV = $34.09. 9-5 The firm’s free cash flow is expected to grow at a constant rate, hence we can apply a constant  growth formula to determine the total value of the firm. Firm value = FCF 1 /(WACC – g) = $150,000,000/(0.10 – 0.05) = $3,000,000,000. To find the value of an equity claim upon the company (share of stock), we must subtract out the  market value of debt and preferred stock.  This firm happens to be entirely equity funded, and this  step is unnecessary.  Hence, to find the value of a share of stock, we divide equity value (or in this  case, firm value) by the number of shares outstanding. Equity value per share
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05 -- Stock Valuation - StocksandTheirValuation

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