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Financial Planning Problems




Question;9-1. Assume Evco, Inc., has a;current price of $50 and will pay a $2 dividend in one year, and its;equity cost of capital is 15%.;What price must you expect it to sell for right after paying the;dividend in one year in order to;justify its current price?;9-2. Anle Corporation has a;current price of $20, is expected to pay a dividend of $1 in one year, and;its expected price right after;paying that dividend is $22.;a. What is Anle?s expected;dividend yield?;b. What is Anle?s expected capital;gain rate?;c. What is Anle?s equity cost of;capital?;9-3. Suppose Acap Corporation will;pay a dividend of $2.80 per share at the end of this year and $3;per share next year. You expect;Acap?s stock price to be $52 in two years. If Acap?s equity cost;of capital is 10%;a. What price would you be willing;to pay for a share of Acap stock today, if you planned to;hold the stock for two years?;b. Suppose instead you plan to;hold the stock for one year. What price would you expect to be;able to sell a share of Acap stock;for in one year?;c. Given your answer in part (b);what price would you be willing to pay for a share of Acap;stock today, if you planned to;hold the stock for one year? How does this compare to you;answer in part (a)?;9-4. Krell Industries has a share;price of $22 today. If Krell is expected to pay a dividend of $0.88 this;year, and its stock price is;expected to grow to $23.54 at the end of the year, what is Krell?s;dividend yield and equity cost of;capital?;9-5. NoGrowth Corporation;currently pays a dividend of $2 per year, and it will continue to pay this;dividend forever. What is the;price per share if its equity cost of capital is 15% per year?;1;9-6. Summit Systems will pay a;dividend of $1.50 this year. If you expect Summit?s dividend to grow;by 6% per year, what is its price;per share if its equity cost of capital is 11%?;9-7. Dorpac Corporation has a;dividend yield of 1.5%. Dorpac?s equity cost of capital is 8%, and its;dividends are expected to grow at;a constant rate.;a. What is the expected growth;rate of Dorpac?s dividends?;b. What is the expected growth rate;of Dorpac?s share price?;9-8. Kenneth Cole Productions;(KCP), suspended its dividend at the start of 2009. Suppose you do;not expect KCP to resume paying;dividends until 2011.You expect KCP?s dividend in 2011 to be;$0.40 per year (paid at the end of;the year), and you expect it to grow by 5% per year thereafter.;If KCP?s equity cost of capital is;11%, what is the value of a share of KCP at the start of 2009?;9-9. DFB, Inc., expects earnings;this year of $5 per share, and it plans to pay a $3 dividend to;shareholders. DFB will retain $2;per share of its earnings to reinvest in new projects with an;expected return of 15% per year.;Suppose DFB will maintain the same dividend payout rate;retention rate, and return on new;investments in the future and will not change its number of;outstanding shares.;a. What growth rate of earnings;would you forecast for DFB?;b. If DFB?s equity cost of capital;is 12%, what price would you estimate for DFB stock?;c. Suppose DFB instead paid a;dividend of $4 per share this year and retained only $1 per;share in earnings. If DFB;maintains this higher payout rate in the future, what stock price;would you estimate now? Should DFB;raise its dividend?;9-10. Cooperton Mining just;announced it will cut its dividend from $4 to $2.50 per share and use the;extra funds to expand. Prior to;the announcement, Cooperton?s dividends were expected to grow;at a 3% rate, and its share price;was $50. With the new expansion, Cooperton?s dividends are;expected to grow at a 5% rate.;What share price would you expect after the announcement?;(Assume Cooperton?s risk is;unchanged by the new expansion.) Is the expansion a positive NPV;investment?;9-11. Gillette Corporation will;pay an annual dividend of $0.65 one year from now. Analysts expect;this dividend to grow at 12% per;year thereafter until the fifth year. After then, growth will level;off at 2% per year. According to;the dividend-discount model, what is the value of a share of;Gillette stock if the firm?s equity;cost of capital is 8%?;+ =;9-12. Colgate-Palmolive Company;has just paid an annual dividend of $0.96. Analysts are predicting;an 11% per year growth rate in;earnings over the next five years. After then, Colgate?s earnings;are expected to grow at the;current industry average of 5.2% per year. If Colgate?s equity cost of;capital is 8.5% per year and its;dividend payout ratio remains constant, what price does the;dividend-discount model predict;Colgate stock should sell for?;9-13. What is the value of a firm;with initial dividendDiv, growing fornyears (i.e., until yearn+ 1) at;rateg1and after that at rateg2forever, when the equity cost of;capital isr?;9-14. Halliford Corporation;expects to have earnings this coming year of $3 per share. Halliford plans;to retain all of its earnings for;the next two years. For the subsequent two years, the firm will;retain 50% of its earnings. It;will then retain 20% of its earnings from that point onward. Each;year, retained earnings will be;invested in new projects with an expected return of 25% per year.;Any earnings that are not retained;will be paid out as dividends. Assume Halliford?s share count;remains constant and all earnings;growth comes from the investment of retained earnings. If;Halliford?s equity cost of capital;is 10%, what price would you estimate for Halliford stock?;9-15. Suppose Cisco Systems pays;no dividends but spent $5 billion on share repurchases last year. If;Cisco?s equity cost of capital is;12%, and if the amount spent on repurchases is expected to grow;by 8% per year, estimate Cisco?s;market capitalization. If Cisco has 6 billion shares outstanding;what stock price does this;correspond to?;9-16. Maynard Steel plans to pay a;dividend of $3 this year. The company has an expected earnings;growth rate of 4% per year and an;equity cost of capital of 10%.;a. Assuming Maynard?s dividend;payout rate and expected growth rate remains constant, and;Maynard does not issue or;repurchase shares, estimate Maynard?s share price.;b. Suppose Maynard decides to pay;a dividend of $1 this year and use the remaining $2 per;share to repurchase shares. If;Maynard?s total payout rate remains constant, estimate;Maynard?s share price.;c. If Maynard maintains the;dividend and total payout rate given in part (b), at what rate are;Maynard?s dividends and earnings;per share expected to grow?;9-17. Benchmark Metrics, Inc.;(BMI), an all-equity financed firm, just reported EPS of $5.00 per;share for 2008. Despite the;economic downturn, BMI is confident regarding its current;investment opportunities. But due;to the financial crisis, BMI does not wish to fund these;investments externally. The Board;has therefore decided to suspend its stock repurchase plan;and cut its dividend to $1 per;share (vs. almost $2 per share in 2007), and retain these funds;instead. The firm has just paid;the 2008 dividend, and BMI plans to keep its dividend at $1 per;share in 2009 as well. In subsequent;years, it expects its growth opportunities to slow, and it will;still be able to fund its growth;internally with a target 40% dividend payout ratio, and;reinitiating its stock repurchase;plan for a total payout rate of 60%. (All dividends and;repurchases occur at the end of;each year.);Suppose BMI?s existing operations;will continue to generate the current level of earnings per;share in the future. Assume;further that the return on new investment is 15%, and that;reinvestments will account for all;future earnings growth (if any). Finally, assume BMI?s equity;cost of capital is 10%.;a. Estimate BMI?s EPS in 2009 and;2010 (before any share repurchases).;b. What is the value of a share of;BMI at the start of 2009?;9-18. Heavy Metal Corporation is;expected to generate the following free cash flows over the next five;years;After then, the free cash flows;are expected to grow at the industry average of 4% per year.;Using the discounted free cash;flow model and a weighted average cost of capital of 14%;a. Estimate the enterprise value;of Heavy Metal.;b. If Heavy Metal has no excess;cash, debt of $300 million, and 40 million shares outstanding;estimate its share price.


Paper#50929 | Written in 18-Jul-2015

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