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

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

Info icon This 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

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern