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##### Financial Concepts Week 5 Exercise 9: Equity Pricing

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solution

**Question**

Question;Instructions;Additional instructions/comments are highlighted in yellow.;To standardize, please leave your answers to two-decimal places, whether they are percentages, or dollars and;cents.;You may submit this Exercise either as a Word file or as an Excel;file. See separate e-mail or posting for attached Excel template.;?As usual;you must show work;a);If you do the work in Excel, we need to see the Excel formula or;algebra embedded in the answer cell(s) on how your answers are calculated.;b);If you do the work in Word document, we need to see the intermediate;calculations typed out, e.g. P0 = D1 / (ks ? gc) = this number divided by;subtracting those two numbers, etc., equals your answer.;c);If student just cut-paste the answers without showing work, it could;be a problem if you got it wrong and there is no way for me to see where the;mistake is and annotate it with corrections....;Name;Instructions;Show;work by showing any formulas used and any intermediate steps in the;calculations.;Company A has projected net income per share for this;year at $4.00 per share. It has;traditionally paid out a dividend of 40% of its net income. Income and;dividends have been growing at a rate of 10% per year. The equity discount rate;for comparable companies is 15%.What is the projected dividend for next year?D1 =What;is the current value of the stock using the [Constant Growth Model of the] Dividend Discount;Model?P0 =[If;from Question 1, having that projected EPS of $4.00,] Company A decides;to reduce its dividend rate to 25%, and expects that the growth rate will;increase as a result of the higher retained earnings to 12% per year: What is the new projected dividend for next year?D1new =What is the new stock value?P0new =;3.[A separate company] Company;B has an ROE of 15%.;What will be its estimated growth rate if it has;a dividend payout ratio of 55%?g =If;the company decreases the dividend payout ratio to 45%, what will be the new;estimated growth rate?gnew =;[A;separate third company] Company C will have earnings per share of $5.00;this year. It pays a dividend equal to 40% of net income. It is expecting that;income and dividends will grow by 30% next year and 20% the year after. Then it;is expecting to return to its historical growth rate of 10% per year. The;relevant discount rate is 15%.What are the projected levels of dividends for years 1;2 and 3.D1 =D2=D3 =What is the value of the stock in year 2?P2 =What is the value of the stock today? [assume dividend D0 has been;paid out].P0 =Company D has an EBITDA of $350 million. It has outstanding;debt of $650 million. Its industry has typically displayed a Value/EBITDA ratio;of between 5x and 7x EBITDA. If Company D has 50 million shares outstanding;what is the estimate of the per share value of this company?

Paper#40868 | Written in 18-Jul-2015

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