Question;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.;9-19. IDX Technologies is a privately held;developer of advanced security systems based in Chicago. As part of your business development;strategy, in late 2008 you initiate discussions with IDX?s founder about the;possibility of acquiring the business at the end of 2008. Estimate the value of;IDX per share using a discounted FCF approach and the following data;? Debt: $30 million;? Excess cash: $110 million;? Shares outstanding: 50 million;? Expected FCF in 2009: $45 million;? Expected FCF in 2010: $50 million;? Future FCF growth rate beyond 2010: 5%;? Weighted-average cost of capital: 9.4%;00;9-21. Consider the valuation of Kenneth Cole;Productions in Example 9.7.;a. Suppose you believe KCP?s initial revenue;growth rate will be between 4% and 11% (with growth slowing in equal steps to;4% by year 2011). What range of share prices for KCP is consistent with these;forecasts?;b. Suppose you believe KCP?s EBIT margin will;be between 7% and 10% of sales. What range of share prices for KCP is;consistent with these forecasts (keeping KCP?s initial revenue growth at 9%)?;c. Suppose you believe KCP?s weighted average;cost of capital is between 10% and 12%. What range of share prices for KCP is;consistent with these forecasts (keeping KCP?s initial revenue growth and EBIT;margin at 9%)?;d. What range of share prices is consistent if;you vary the estimates as in parts (a), (b), and (c) simultaneously?;a;9-22. You notice that PepsiCo has a stock price;of $52.66 and EPS of $3.20. Its competitor, the Coca-Cola Company, has EPS of;$2.49. Estimate the value of a share of Coca-Cola stock using only this data.;9-23. Suppose;that in January 2006, Kenneth Cole Productions had EPS of $1.65 and a book;value of equity of $12.05 per share.;a. Using the average P/E multiple in Table;9.1, estimate KCP?s share price.;b. What range of share prices do you estimate;based on the highest and lowest P/E multiples in Table 9.1?;c. Using the average price to book value;multiple in Table 9.1, estimate KCP?s share price.;d. What range of share prices do you estimate;based on the highest and lowest price to book value multiples in Table 9.1?;9-24. Suppose;that in January 2006, Kenneth Cole Productions had sales of $518 million;EBITDA of $55.6 million, excess cash of $100 million, $3 million of debt, and;21 million shares outstanding.;a. Using the average enterprise value to sales;multiple in Table 9.1, estimate KCP?s share price.;b. What range of share prices do you estimate;based on the highest and lowest enterprise value to sales multiples in Table;9.1?;c. Using the average enterprise value to;EBITDA multiple in Table 9.1, estimate KCP?s share price.;d. What range of share prices do you estimate;based on the highest and lowest enterprise value to EBITDA multiples in Table;9.1?;9-25. In;addition to footwear, Kenneth Cole Productions designs and sells handbags;apparel, and other accessories. You decide, therefore, to consider comparables;for KCP outside the footwear industry.;a. Suppose that Fossil, Inc., has an;enterprise value to EBITDA multiple of 9.73 and a P/E multiple of 18.4. What;share price would you estimate for KCP using each of these multiples, based on;the data for KCP in Problems 23 and 24?;b. Suppose that Tommy Hilfiger Corporation has;an enterprise value to EBITDA multiple of 7.19 and a P/E multiple of 17.2. What;share price would you estimate for KCP using each of these multiples, based on;the data for KCP in Problems 23 and 24?.;9-26. Consider;the following data for the airline industry in early 2009 (EV = enterprise;value, BV = book value, NM = not meaningful because divisor is negative).;Discuss the challenges of using multiples to value an airline.;9-27. You read in the paper that Summit Systems from;Problem 6 has revised its growth prospects and now expects its dividends to;grow at 3% per year forever.;a. What is the new value of a share of Summit Systems stock;based on this information?;b. If you tried to sell your Summit Systems stock after reading this news;what price would you be likely to get and why?;9-28. In early 2009, Coca-Cola Company had a;share price of $46. Its dividend was $1.52, and you expect Coca-Cola to raise;this dividend by approximately 7% per year in perpetuity.;a. If Coca-Cola?s equity cost of capital is;8%, what share price would you expect based on your estimate of the dividend;growth rate?;b. Given Coca-Cola?s share price, what would;you conclude about your assessment of Coca-Cola?s future dividend growth?;9-29. Roybus, Inc., a manufacturer of flash;memory, just reported that its main production facility in Taiwan was destroyed in a fire.;While the plant was fully insured, the loss of production will decrease Roybus?;free cash flow by $180 million at the end of this year and by $60 million at;the end of next year.;a. If Roybus has 35 million shares outstanding;and a weighted average cost of capital of 13%, what change in Roybus? stock;price would you expect upon this announcement? (Assume the value of Roybus?;debt is not affected by the event.);b. Would you expect to be able to sell Roybus?;stock on hearing this announcement and make a profit? Explain.;9-30. Apnex, Inc., is a biotechnology firm that;is about to announce the results of its clinical trials of a potential new;cancer drug. If the trials were successful, Apnex stock will be worth $70 per;share. If the trials were unsuccessful, Apnex stock will be worth $18 per;share. Suppose that the morning before the announcement is scheduled, Apnex;shares are trading for $55 per share.;a. Based on the current share price, what sort;of expectations do investors seem to have about the success of the trials?;b. Suppose hedge fund manager Paul Kliner has;hired several prominent research scientists to examine the public data on the;drug and make their own assessment of the drug?s promise. Would Kliner?s fund;be likely to profit by trading the stock in the hours prior to the;announcement?;c. What would limit the fund?s ability to;profit on its information?
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