Apply the Residual Earnings Model (CH-5) to the data below to estimate the Stock Value. Discount rate is >> 12.75% 1) 12Pts Assume Residual Earnings for Year 4 and later remains constant S amount at the t=3 level you calculated (90). 2) 6pts What's new Stock $ estimate if now starting at Yr 4, Resid. Eams remains at repeat constant annual > $ 2.75 3) 6pts What's new Stock S estimate if now starting at Yrt=4 Resid. Earns grows from t =3 $ level at constant 4.00% Current Forecast Forecast Forecast Forecast Exam-2 due Oct-31 Actual t=1 t=2 t=3 EARINGS PER SHR$ 6.00 $ 6.75$ 7.65$ 8.75 DIVIDEND $ 2.00 $ 2.10 $ 2.20 $ 2.35 BOOK VALUE $ 48.00 $ 52.65$ 58.10 IS 64.50 Calculate % RET ON EQUITY 2 2 ? 0.1275 $ Answ #2 Part 3 Annual growth after t=3 => 4.00% Stk Value incl growing CV > $ Answ #3 12021 24 pts FREE CASH FLOW VALUATION Exm-2 NAME> Oct31 Use the forecast below to find this stock's value. Expected constant growthg for Free Cash Flow is -> DEBT-> $ 5,000 WACC-> Assumes tax rate is -->> 0.235 3.20% 7.80% B D E F S Million Change in Capital EBIT EBIT (1-TxR) Depreciation Work Capital Spending H Free Cash Flow > Firm Pres. Value FCF Firm FORECAST YEAR Pres. Value Factors 1 $900 $75 S40 S225 2 S970 585 $50 S240 5688.5 $742.1 5803.3 5860.6 3 $1,050 $100 S60 S250 4 $1.125 S110 570 S265 IS A Answ #1 TERMINAL VALUE PROJECTION 5 Assume all future Free Cash Flow to Firm grow at contant 'g' = 0.032 Terminal value at START of Year 5 = FCF END Yr 4 / (WACC -'g') where 'g' is projected constant future growth rate of FCF, assumed in this probat> 0.032 PVF Terminal Pres. Value IS Answ #2 SUM OF PVs OF PROJECTED FCF TO TestCo = millions $ 5.000 $ 5,000.00 Assume this firm's debt is now 5 millions >> SUBTRACT DEBT PAY-OFF SOLUTION OF VALUE OF TestCo's EQUITY based on residual CF to shareholders millions 55 $ 42.00? ? ? % RET ON EQUITY ??? > ? ? ? At=1 answA Forecast t = 3 6.75 1.60 At2 answ At 3 answ Assume # of shares issued is unchanged and Other comprehensive income' $0 Apply the Residual Earnings Model (CH-5) to the data below to estimate the Stock Value. Discount rate is >> 12.75% 1) 12Pts Assume Residual Earnings for Year 4 and later remains constant S amount at the t=3 level you calculated (90). 2) 6pts What's new Stock $ estimate if now starting at Yr 4, Resid. Eams remains at repeat constant annual > $ 2.75 3) 6pts What's new Stock S estimate if now starting at Yrt=4 Resid. Earns grows from t =3 $ level at constant 4.00% Current Forecast Forecast Forecast Forecast Exam-2 due Oct-31 Actual t=1 t=2 t=3 EARINGS PER SHR$ 6.00 $ 6.75$ 7.65$ 8.75 DIVIDEND $ 2.00 $ 2.10 $ 2.20 $ 2.35 BOOK VALUE $ 48.00 $ 52.65$ 58.10 IS 64.50 Calculate % RET ON EQUITY 2 2 ? 0.1275 $ Answ #2 Part 3 Annual growth after t=3 => 4.00% Stk Value incl growing CV > $ Answ #3 12021 24 pts FREE CASH FLOW VALUATION Exm-2 NAME> Oct31 Use the forecast below to find this stock's value. Expected constant growthg for Free Cash Flow is -> DEBT-> $ 5,000 WACC-> Assumes tax rate is -->> 0.235 3.20% 7.80% B D E F S Million Change in Capital EBIT EBIT (1-TxR) Depreciation Work Capital Spending H Free Cash Flow > Firm Pres. Value FCF Firm FORECAST YEAR Pres. Value Factors 1 $900 $75 S40 S225 2 S970 585 $50 S240 5688.5 $742.1 5803.3 5860.6 3 $1,050 $100 S60 S250 4 $1.125 S110 570 S265 IS A Answ #1 TERMINAL VALUE PROJECTION 5 Assume all future Free Cash Flow to Firm grow at contant 'g' = 0.032 Terminal value at START of Year 5 = FCF END Yr 4 / (WACC -'g') where 'g' is projected constant future growth rate of FCF, assumed in this probat> 0.032 PVF Terminal Pres. Value IS Answ #2 SUM OF PVs OF PROJECTED FCF TO TestCo = millions $ 5.000 $ 5,000.00 Assume this firm's debt is now 5 millions >> SUBTRACT DEBT PAY-OFF SOLUTION OF VALUE OF TestCo's EQUITY based on residual CF to shareholders millions 55 $ 42.00? ? ? % RET ON EQUITY ??? > ? ? ? At=1 answA Forecast t = 3 6.75 1.60 At2 answ At 3 answ Assume # of shares issued is unchanged and Other comprehensive income' $0