8:34 Search keystrokes if using calculator or with excel submit the original excel file. Also include a brief discussion of your results using your OWN examples and opinions Chapter 9 Stocks: Show your steps either following the textbook guidelines for setting up these stock valuation problems or your own steps: There are three steps: 1. Calculate the dividend cash flow cach year using the growth rate 2. Determine where the growth of the company becomes constant (this is the key constant growth rate model), this is called the terminal or horizon value. 3. Place each of these cash flows (or dividends) into the calculator or excel using the interest rate given and calculate NPV which is called the intrinsic value. 1. The earnings of Accurate Forecasting Company are expected to grow at an annual rate of 14% over the next 5 years and then slow to a constant rate of 10% per year. Accurate currently pays a dividend of $0.36 per sharc. What is the value of Accurate stock to an investor who requires a 16% rate of retur? If stock has a market price of $15, do you buy? Show all work and discuss 2. D Incs, free cash flow was just FCF0 = $1.32. Analysts expect the company's free cash flow to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The WACC for this company 9.00%. D has 54 million in short-term investments and $14 million in debt and 1 million shares outstanding. What is the stock price at year 2? What is the best estimate of the stock's current intrinsic price? If MSMRTIKE S ss. do you buy or 11:15 Chapter 8: Risk and Rates of Return 7. You are evaluating two companies to determine which is a better return based on the risk for you. The first Company Corp USA has return of 12.5%, a beta of 2.2 and variation of 47% of your expected return. Corporation Global Inc has a return of 9.75%, a beta of 1.4 and a variation of 33%. The guaranteed rate on your investment is 5.5% along with a market risk premium of 4%. Complete AND briefly discuss the following: a. Each of the companies have a CV of how much? b. Which company is riskier for your portfolio and why? c. What is the required return of each company? What does this mean? d. Let's say you decide to invest $55,000 in Global Inc and $80,000 in Corp USA Calculate the return on these two companies. e. Briefly discuss the concept of risk and retum in finance as it applies to a corporation. Provide an example. Chapter 10: 8. American Inc. recently hired you as a consultant to estimate the company's WACC. You have obtained the following information. (1) The firm's noncallable bonds mature in 20 years, have an 8.00% annual coupon, a pa value of $1,000, and a market price of $1,225.00. (2) The company's tax rate is 40%. (3) The risk-free rate is 4.50%, the market risk premium is 5.50%, and the stock's beta is 1.20. (4) The target capital structure consists of 35% debrand her berets common equity. 8:347 Search much? b. Which company is riskier for your portfolio and why? c. What is the required return of each company? What does this mean? d. Let's say you decide to invest $55,000 in Global Inc and $80,000 in Corp USA Calculate the return on these two companies. e. Briefly discuss the concept of risk and retur in finance as it applies to a corporation. Provide an example. Chapter 10: 8. American Inc. recently hired you as a consultant to estimate the company's WACC. You have obtained the following information. (1) The firm's noncallable bonds mature in 20 years, have an 8.00% annual coupon, a par value of $1,000, and a market price of $1,225.00. (2) The company's tax rate is 40%. (3) The risk-free rate is 4.50%, the market risk premium is 5.50%, and the stock's beta is 1.20. (4) The target capital structure consists of 35% debt and the balance is common equity. The firm uses the CAPM to estimate the cost of equity, and it does not expect to issue any new common stock. What is its WACC? Show all work and discuss
