59533341-FM11-Ch-07-Instructors-Manual-1

In year 4 answer now we have this situation 0 r 13 s g

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: we have this situation: 0 r = 13% s g = 0% 2.00 | 1 2 3 | | | g = 0% 2.00 2.00 1.77 1.57 1.39 20.99 Ö 25.72 = P0 g = 0% 2.00 4 g = 6% | 2.12 2.12 Ö P3 = 30.29 = 0.07 During year 1: Dividend Yield = $2.00 = 0.0778 = 7.78%. $25.72 Capital Gains Yield = 13.00% - 7.78% = 5.22%. Again, in year 4 temp force becomes a constant growth stock; hence g = capital gains yield = 6.0% and dividend yield = 7.0%. Mini Case: 7 - 22 j. Finally, assume that Temp Force¶s earnings and dividends are expected to decline by a constant 6 percent per year, that is, g = -6%. Why would anyone be willing to buy such a stock, and at what price should it sell? What would be the dividend yield and capital gains yield in each year? Answer: The company is earning something and paying some dividends, so it clearly has a value greater than zero. That value can be found with the constant growth formula, but where g is negative: 1 r g = 0 (1  g) r g © ¨ P0 = = $2.00(0.94) $1.88 = = $9.89. 0.13  ( 0.06) 0 .19 ince it is a constant growth stock: g = Capital Gains Yield = -6.0%, hence: Dividend Yield = 13.0% - (-6.0%) = 19.0%. As a check: Dividend Yield = $1.88 = 0.190 = 19.0%. $9.89 The dividend and capital gains yields are constant over time, but a high (19.0 percent) dividend yield is needed to offset the negative capital gains yield. Mini Case: 7 - 23 k. What is market mutliple analysis? Answer: Analysts often use the P/E multiple (the price per share divided by the earnings per share) or the P/CF multiple (price per share divided by cash flow per share, which is the earnings per share plus the dividends per share) to value stocks. For example, estimate the average P/E ratio of comparable firms. This is the P/E multiple. Multiply this average P/E ratio by the expected earnings of the company to estimate its stock price. The entity value (V) is the market value of equity (# shares of stock multiplied by the price per share) plus the value of debt. Pick a measure, such as EBITDA, sales, customers, eyeballs, etc. Calculate the average entity ratio for a samp...
View Full Document

This note was uploaded on 09/14/2012 for the course MBA 341 taught by Professor Jamnadas during the Spring '12 term at LIM.

Ask a homework question - tutors are online