FINC 7316 Stock Valuation Consider the following information about Truly Good Coffee, Inc. Total assets (Smillions) 240 Total debt (Smillions) 115 Preferred stock (Smillions) 25 Common stockholders' equity (Smillions) 100 Net profit after taxes (Smillions) 22.5 Number of preferred stock outstanding (millions) 1 Number of common stock outstanding (millions) 10 Preferred dividends paid (per share) 2 Common dividends paid (per share) 0.75 Market price of the preferred stock ($/per share) 30.75 Market price of the common stock (S/per share) 25 Use the information in the table to find the following: a. The company's book value. b. Its book value per share. c. The stock's earnings per share (EPS). d. The dividend payout ratio. e. The dividend yield on the common stock. f. The dividend yield on the preferred stock. 1. The beta for the DAK Corporation is 1.25. If the yield on 30 year T-bonds is 5.65%, and the long term average return on the market is 11%. Calculate the required rate of return for DAK Corporation. 2. Ross Corporation paid dividends per share of $1.20 at the end of 2009. At the end of 2019 it paid dividends per share of $3.50. Calculate the compound annual growth rate in dividends. 3. Hunt Corporation had a dividend payout ratio of 63% in 2019. What was the retention rate in 2019? 4. The risk-free rate of return is 8 percent; the expected rate of return on the market is 12 percent. Stock X has a beta coefficient of 1.3, an earnings and dividend- growth rate of 7 percent, and a current dividend of $2.40. If the stock is selling for $35, what should you do? 5. Two stocks each pay a $1 dividend that is growing annually at 8 percent. Stock A has a beta of 1.3; stock B's beta is 0.8. a. Which stock is morc volatile? b. If treasury bills yield 6 percent and you expect the market to rise by 12 percent, what is your risk-adjusted required rate of return? c. Using the dividend-growth model, what is the maximum amount you would be willing to pay for each stock? d. Why are your valuations different? 6. As an investor you have a required rate of return of 14 percent for investments in risky stocks. You have analyzed three risky firms and must decide which (if any) to purchase. Your information: Firm A B Current dividends $1.00 $3.00 $7.50 Expected annual growth 7% 2% (-1%) rate in dividends Current market price $23 $47 $60 a. What is the maximum price? Which (if any) should you buy? b. If you bought Stock A, what is your implied rate of return? c. If your required rate of return were 10 percent, what should be the price necessary to induce you to buy Stock A? 7. Presently, Stock A pays a dividend of $1.00 a share and you expect the dividend to grow rapidly for the next four years at 20 percent. Thus the dividend payments will be Year Dividend $1.20 2 1.44 3 1.73 2.07 After this initial period of super-growth, the rate of increase in the dividend should decline to 8 percent. If you want to earn 12 percent on investments in common stock, what is the maximum you should pay for this stock? 4 8. The National Motor Company's last dividend was $1.25 and the directors expect to maintain the historic 4 percent annual rate of growth. You plan to purchase the stock today because you feel that the growth rate will increase to 7 percent for the next three years and the stock will then reach $25.00 per share. (a) How much should you be willing to pay for the stock if you require a 16 percent return? (b) How much should you be willing to pay for the stock if you feel that the 7 percent growth rate can be maintained indefinitely and you require a 16 percent return? EPS 9. The P/E ratio for BMI Corporation 21 and the P/Sales ratio is 5.2. The industry P/E ratio is 35 and the industry P/Sales ratio is 7.5. Based on relative valuation, is BMI shares over or undervalued? 10. Tayco Corporation has just paid dividends of $3 per share. The earnings per share for the company was $4. If you believe that the appropriate discount rate is 15%, and the long term growth rate is 6%, then the firm's P/E ratio is 11. Macoun Co.'s most recent EPS were $3.25 and they are expected to grow at a rate of 5% for the near future. The stock currently sells for $48.75. What is the price to forecasted earnings ratio? 12. You know the following concerning a common stock: $3.00 Payout ratio 25% P/E 10 Annual rate of growth of 6% earnings and dividends If you want to earn 10 percent, should you buy this stock? What is the maximum price you should be willing to pay for the stock? 13. Consider a firm that has just paid a dividend of $2. An analyst expects dividends to grow at a rate of 8% per year for the next five years. After that dividends are expected to grow at a normal rate of 5% per year. Assume that the appropriate discount rate is 7%. a) Determine dividends for years 1, 2, and 3. b) Estimate the future price of the stock in year 5. c) What is the present value today of dividends from years 1 to 5? d) Estimate the price of the stock today (Po). 14. Water Co. is a manufacturer of boat parts and has been in business only a few years. Its board of directors decided to start paying a dividend to help boost the attractiveness of its stock. The dividend will be $0.50 per share next year. After that dividends will increase by 4 percent per year. The company has a beta of 1.6. The market rate of return is 8% and the T-bill rate is 3%. Should you purchase shares in this firm at the current market price of $6.98 per share? 15. Micro Corp.just paid dividends of $2 per share. Assume that over the next three years dividends will grow as follows, 5% next year, 15% in year two, and 25% in year 3. After that growth is expected to level off to a constant growth rate of 10% per year. The required rate of return is 15%. Calculate the intrinsic value using a multistage dividend discount model
