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# 2020 307 010500 13055 13362 with slowing dividend

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2020 3.07 0.10500 130.55 133.62 with slowing dividend growth 24.82 = PV of CF Beginning of constant E17 * (1+ F17)/(B5 - F17) growth period NPV(B5,H2:H17) b., c. Using the Excel spreadsheet, we find that the intrinsic values are \$25.76 and \$13.50, respectively. 18-11

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18-12
21. The solutions derived from Spreadsheet 18.2 are as follows: Intrinsic value: FCFF Intrinsic value: FCFE Intrinsic value per share: FCFF Intrinsic value per share: FCFE a. 40,170 31,187 11.23 10.31 b. 47,087 36,507 13.52 12.07 c. 34,337 26,520 9.30 8.77 22. a. The value of a share of Rio National equity using the Gordon growth model and the capital asset pricing model is \$22.40, as shown below. Calculate the required rate of return using the capital asset pricing model: k = r f + β (k M – r f ) = 4% + 1.8(9% – 4%) = 13% Calculate the share value using the Gordon growth model: 40 . 22 \$ 12 . 0 13 . 0 ) 12 . 0 1 ( 20 . 0 \$ g k g) (1 D P o 0 = + × = + × = b. The sustainable growth rate of Rio National is 9.97%, calculated as follows: g = b × ROE = Earnings Retention Rate × ROE = (1 – Payout Ratio) × ROE = % 97 . 9 0997 . 0 35 . 270 \$ 16 . 30 \$ 16 . 30 \$ 20 . 3 \$ 1 Equity Beginning Income Net Income Net ividends D 1 = = × = × 23. a. To obtain free cash flow to equity (FCFE), the two adjustments that Shaar should make to cash flow from operations (CFO) are: 1. Subtract investment in fixed capital: CFO does not take into account the investing activities in long-term assets, particularly plant and equipment. The cash flows corresponding to those necessary expenditures are not available to equity holders and therefore should be subtracted from CFO to obtain FCFE. 2. Add net borrowing: CFO does not take into account the amount of capital supplied to the firm by lenders (e.g., bondholders). The new borrowings, net of debt repayment, are cash flows available to equity holders and should be added to CFO to obtain FCFE. 18-13

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b. Note 1 : Rio National had \$75 million in capital expenditures during the year. Adjustment : negative \$75 million The cash flows required for those capital expenditures (–\$75 million) are no longer available to the equity holders and should be subtracted from net income to obtain FCFE. Note 2 : A piece of equipment that was originally purchased for \$10 million was sold for \$7 million at year-end, when it had a net book value of \$3 million. Equipment sales are unusual for Rio National. Adjustment : positive \$3 million In calculating FCFE, only cash flow investments in fixed capital should be considered. The \$7 million sale price of equipment is a cash inflow now available to equity holders and should be added to net income. However, the gain over book value that was realized when selling the equipment (\$4 million) is already included in net income. Because the total sale is cash, not just the gain, the \$3 million net book value must be added to net income. Therefore, the adjustment calculation is:
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2020 307 010500 13055 13362 with slowing dividend growth...

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