$1.$ ABC Stock is currently priced at $$75.$ The stock is expected to be

worth $$98$ in one year and you expect to receive a dividend of $$2\mathrm{.}00$ a

share. The beta of ABC is $2\mathrm{.}00.$ The risk$-$free rate is $3\%$ and the

expected return of the stock market is $10\%($the market risk premium

is $7\%).$ Should you invest in ABC stock? Explain why. What is the

fair value estimate for ABC stock today?

$2.$ ABC Stock currently pays a dividend of $$5\mathrm{.}00$ a share D$(0)=5\mathrm{.}00.$

That dividend is expected to grow at $10\%$ for the next $4$ years, then

$3\%$ thereafter. The required rate of return is $9\%.$ What is the

intrinsic value of ABC$$s stock? How does your valuation get

impacted if the required rate of return is $11\%?$ What could cause

this required rate of return to increase $($list $2$ variables$)?$

$3.$ DEF currently produces annual free cash flow of $65$ billion a year

$($FCF$0=$ $$65$B$).$ The company has debt of $$110$ billion and Cash and

Marketable Securities of $$210$ billion. The stock currently trades in

the marketplace at $$200$ and that there are $4\mathrm{.}5$ billion shares

outstanding, assume that FCF is going to grow at $6\%$ for the next $3$

years as they introduce new products and that in year $4$ and beyond

the FCF will grow at $1\%.$ What is the intrinsic value of the stock

given this information? Assume a WACC of $8\%.$

$4.$ Calculate the WACC for PG given the following:

a$)$ The company has outstanding debt that matures in $15$ years that has

a coupon of $5\%.$ It pays interest semi$-$annually and the bonds are

callable in $1$ year at a $5\%$ premium to par. The current price of the

bonds is $980.$ For a reference $15-$year Treasuries are yielding

$4\mathrm{.}25\%.($PG bonds are rated AA$).$ Their cost of borrowing is almost

the same as the US Treasury $(+0\mathrm{.}25-0\mathrm{.}75\%).$ You should calculate

the YTM and YTC if the bonds are likely to be called then you

cannot use the YTM and you need to estimate their cost of borrowing

in another way $$ using comparable rates.

b$)$ PG has outstanding preferred that have an $5\mathrm{.}5\%$ coupon, $$100$ par

value and are currently priced at $$95.$ If new preferred was issued

the company would incur flotation costs of $5\%.$

c$)$ The company$$s stock is currently priced at $$100,$ and the expected

dividend is $$4\mathrm{.}00.$ That dividend is expected to grow at $4\%$

forever. The beta of PG is $0\mathrm{.}6$ and the RFR and MRP are $3\%$ and $8\%$

respectively. Ignore flotation costs for your cost of equity.

d$)$ The target structure is $60\%$ equity, $30\%$ debt and $10\%$ preferred.

The tax rate is $40\%.$

e$)$ If the company had no residual cash and new issued equity would

incur a flotation cost of $20\%.$ Calculate a new the WACC using only

the market implied cost of equity and keeping all other factors the

same. Comment on your finding.

$5.$ Given the data below calculate the expected return and standard

deviation for a portfolio that is constructed by investing $50\%$ in

each stock. Discuss the results of your portfolio with that of the

individual stocks with the data given below. If the risk$-$free rate

is $3\%$ and the market risk premium is $7\%-$ are either of these stocks

or the portfolio of stocks a good investment? Why?

$6.$ ABC$$s stock is currently priced at $$100$ in the marketplace and

is fairly value. This means that the market price $=$ the

intrinsic value. If the stock is expected to pay a dividend for

the next three years of $$2\mathrm{.}00.$ What is the expected value of the

stock $3$ years from today if the beta of the stock is $1\mathrm{.}4,$ the

risk$-$free rate is $3\%$ and the market risk premium is $6\%?$ For this

analysis, assume that CAPM perfectly predicts the total return.

Assume that dividends are reinvested at $4\%.$

Note : This is a time value of money problem that incorporates CAPM

and stock valuation. There are a lot of ways to attack this problem

and I will accept several different versions as correct.