Coca Cola (KO) price is $61/share. The company is expected to pay dividend
of $1.7/share next year. (In reality, dividends are paid quarterly. In this question we will assume for
simplicity that all dividends are paid at year end). Coca Cola's cost of capital is 7%.
a. Assuming that Coca Cola is expected to pay all its payout in the form of dividends and that it expects
to increase dividends at a constant rate forever, what is Coca Cola's expected dividend
growth rate?
b. Coca Cola's P/E ratio is 25.1x (E=expected earnings next year). Assuming that Coca Cola's
existing assets are expected to earn constant earnings forever, what portion of the firm
stock price is attributed to Coca Cola's growth opportunities (PVGO)?
c. You want to know whether Coca Cola is overvalued or not. You compare its P/E ratio to its
peers. You observe that, on average, Coca Cola's peers' P/E ratio is 26.0x. Should
you buy Coca Cola's stock or not? Explain.

2.

Ontel Inc expects an EPS of $10 and DPS (dividend per share) of $6 next year and expects to
maintain the same payout ratio for the foreseeable future. It invests its
retained earnings at an ROIC of 15%.
a. What is Ontel's growth rate?
b. Given a cost of capital of 12%, what should be Ontel's price per share?

3.

Suppose that in question 2, Ontel announces that it is going to decrease its dividend to $4 next
year in order to retain more money into its projects.
a. Calculate the new stock price, assuming that the rest of the parameters of the question
stay unchanged. Explain why the new stock price increases.
b. In real life, when a firm announces a decrease in dividends the stock price usually goes
down. Explain what could be the reason for the discrepancy between the increase in
price in (a) and the negative announcement effect.

4.

A private company, Exclamation Inc., is interested in launching an Initial Public Offering (IPO)

on its shares and has approached you for an initial valuation analysis. You collected the information in the table below to help with the analysis.

You found out that Exclamation's closest peer is Cisco.

a. Calculate the equity value of Exclamation using Net Income multiples (aka P/E multiple). Exclamation's net income projection for next year (FY1) is $6.00B.

(Hint: You do not need per-share information)

b.A more accurate comparable company valuation will require the use of more than just one company.

After a lengthy analysis, you conclude that besides Cisco, other comparable firms for Exclamation include Microsoft (MSFT), Google (GOOG), IBM (IBM) and Oracle (ORCL)

(these five firms aka the "comparable universe").

Value the company using the average multiples for the comparable universe.

c.Repeat (b) using median comparable multiples

d. Why is it useful to look not only at average multiples but also at median multiples?

Valuation ($ Billions)

Microsoft

Google

IBM

Oracle

Cisco

Equity value

280

125

130

75

125

Net Income (projection for next year)

13.5

2

8.5

3.5

5.8

5.

After spending $3 million on research, Better Mousetraps has developed a new trap. The project requires an initial investment in plant and equipment of $6 million. This investment will be depreciated straight-line over five years to a value of zero, but, when the project comes to an end in five years, the equipment can in fact be sold for $500,000. The firm believes that working capital at each date must be maintained at 10% of next year's forecasted sales. Production costs are estimated at $1.50 per trap and the traps will be sold for $4 each. (There are no marketing expenses). Sales forecasts are given in the following table. The firm pays tax at 35% and the required return on the project is 12%. What is the NPV and IRR?
Year	0	1	2	3	4	5
Sales (millions of traps)	0	0.5	0.6	1	1	0.6

6.

CSC is an oven manufacturer. It is evaluating a project to produce new ovens. The project has the following features:
a. Initial investment in plant and equipment today is $2 million.
b. First-year sales are forecasted at $1million and costs at $300,000. Both are expected to stay constant for the duration of the project.
The project will last three years.
c. Working capital each year is forecasted at 20% of following-year sales.
d. The project will use a facility of CSC. Had CSC not do the project, the facility would have been rented for
$10,000 a year (cash flow after tax).
e. For tax purposes, the plant is expected to depreciate straight line over 5 years with a salvage value of zero.
However, at year 3, when the project ends, the firm expects to sell the machines for $1m (before taxes).
f. Taxes are 35% on firms' profits and capital gains. The discount rate is 10%.
g. CSC expects that the introduction of the new oven will result in migration of customers from CSC's current oven line to the new one.
The after tax cash loss from reduction of sales of the current oven line is expected to be $10,000 a year.
Should CSC invest in the project?