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

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

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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...
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