1. (Three-stage DDM) The current dividend for Connell Corp is $1.00. In stage 1, which lasts 3 years, the dividend will grow at 0% per year. In stage 2, which also lasts 4 years, the dividend will grow at 30% per year. Finally, in stage 3, the dividend will grow at 6% forever.

A. If the required rate of return is 10%, what is the value per share?

B. If the current market price of Connell Corp is $35, what will be your rate of return if you realize all of the dividends described in the model?

2. (FCFF valuation model) Build a valuation model for Dragon Limited based on the following information:

Sales were $100 million in the year just ended. Sales will grow at 100% annually for two years, and then at 5% annually forever.

EBIT will be 30% of sales.

Depreciation is 4% of the current years sales

Capital expenditures are 4% of the current years sales plus 40% of the current years increase in sales

The investment in working capital will be 10% of the current years increase in sales

The income tax rate for Dragon Limited is 25%

The weighted average cost of capital is 12%

Dragon has 40 million outstanding shares

Dragon has $200 million of outstanding debt.

What is the Dragon Limited value per share?

3. (FCFE valuation model) From the text, FCFF = EBIT(1-t) + Dep Capex InvWC, and FCFE = FCFF Int(1-t) + net borrowing. Or FCFE = EBIT(1-t) + Dep Capex InvWC Int(1-t) + net borrowing. Since EBIT(1-t) Int(1-t) = NI, we can use FCFE = NI + Dep Capex InvWC + net borrowing.

Value the shares of Moose Service Co. The modeling assumptions are:

Current sales are $60 million. They will grow at 30% annually for the first four years, and then grow at 6% annually thereafter.

Net income will be 10% of sales.

The net investment in fixed capital (Capex Depr) will be 50% of the sales increase each year

The investment in working capital will be 10% of the sales increase.

Debt financing will be 40% of the net investments in fixed capital and working capital each year

The required rate of return for equity is 11%.

There are 2 million outstanding shares.

What is the intrinsic value per share of Moose Service?