Day 17-Ch 7 & 11-10.31.11

Day 17-Ch 7 & 11-10.31.11 - BusinessManagement201 Day17

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Business Management 201 Day 17 Chapter 7: Stock Valuation Chapter 11: Capital Budgeting October 31, 2011
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Day 17 Agenda 1) Happy Halloween! 2) POW #8: Mason Products—Grayson Products Used in  Class on Wednesday 3) POW Quiz #8: Due Friday, November  4 at 11:59 PM 4) First TA Review Sessions this Week: TA Open Lab Session—Tuesday 2:00 PM-3:00 PM in 251 TNRB TA POW Review Session—Tuesday 7:00 PM-8:00 PM in 3108 JKB 1) Course Survey Feedback 2) Chapter 7: Stock Valuation Review 3) Chapter 11 & 12: Capital Budgeting Discussion
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Common Stock:  Common Stock:  Two Stage Growth Model Two Stage Growth Model
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Value =  PV(Stage 1) + PV(Stage 2) Stage 1 :  PV of abnormally high growth dividends  [i.e. “estimation” or “supernormal” period] . Process:  Calculate and find the PV of each super- normal dividend. Stage 2:  PV of normal dividends [a  growing  perpetuity  starting after the supernormal  period]. Process:  Use GGM Formula: “Capitalization Rate” V = D 0 *(1+g)           (k CS  – g) Two Stage Growth Model
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Due to a research development, earnings and  dividends in Carlisle Corp are expected to  grow at a   rate of 21%  for the  next 4 years .   After this period, the firm is expected to  grow at the  industry average rate of 4.25%  forever.   The firm  recently paid a dividend of $1.45  and the  required return is 10%. Two Stage Growth Model Review Based on these growth estimates, what is  the most you should pay today for one  share of Carlisle Corp stock?
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Stage 1 Cash Flows Shortcut Find present value of earning for first four years  (D 0 =$1.45; g=21%; Discount Rate =10%):                       Year 1         Year 2         Year 3         Year  4 Future value  $1.7545 $2.123          $2.569       $3.108 On Calculator Dividend Formula: D 0 *(1+g) 1.45*1.21=$1.7545 1.7545*1.21=$2.123 2.123*1.21=$2.569 2.569*1.21=$3.108 Calculator Keystrokes :   1) 0  CF j  –Flash 0 2) 1.7545  CF j  –Flash 1 3) 2.123  CF j  –Flash 2 4) 2.569  CF j  –Flash 3 5) 3.108   CF j  –Flash 4 6) 10  I/YR 7) 2 nd  Function NPV 8) Answer:  $7.402
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Value Stage 2 Cash Flows  (1 of 2) “Capitalize” terminal earnings with the Constant (aka  Gordon) Growth Model: GGM denominator (cap rate): k-g = 0.10-0.0425 = 0.0575 Year  5  dividend : $3.24 (3.108 x  1.0425=$3.24 ) Capitalized value:  $56.35  ($3.24/0.0575= $56.35) Question:  Where on the time line does this  $56.35  fall?  Answer:  This is the Price at year 4 (i.e.  P 4 ) and is  interpreted as the value of excess earnings from time 5  through infinity!!
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This note was uploaded on 01/06/2012 for the course BUS M 201-1 taught by Professor Jennlarson during the Fall '11 term at BYU.

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Day 17-Ch 7 & 11-10.31.11 - BusinessManagement201 Day17

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