Homework 6 Fin 607

1. Herrs Computer Chips Inc. is experiencing a period of rapid growth. Earnings and dividends are expected to grow at a rate of 12% during the next 2 years, at 10% in the third year, and at a constant rate of 6% thereafter. Wises last dividend was $2.25, and the required rate of return on the stock is 14%. Calculate the value of the stock today.

2. Simmons Inc.s current stock price is $30, and its last dividend was $2.40. In view of Simmonss strong financial position and its consequent low risk, its required rate of return is only 9%. If dividends are expected to grow at a constant rate g in the future, and if r_s is expected to remain at 9%, then what is Simmons expected stock price 5 years from now?

3. Wendys World stock has a required return of 14.40%. The company, which plans to pay a dividend of $4.00 per share in 2021, anticipates that its future dividends will increase at an annual rate consistent with that experienced over the 2014-2020 period, when the following dividends were paid:

Year	Div per Shr
2014	$3.05
2015	$3.20
2016	$3.25
2017	$3.33
2018	$3.44
2019	$3.65
2020	$3.75

1. If the risk-free rate is 4%, what is the risk premium on Wallys stock?
2. Using the constant-growth model, estimate the value of Wallys stock.

4. Williamsburg Inc. has never paid a dividend, and when the firm might begin paying dividends is not known. Its current free cash flow is $100,000, and this FCF is expected to grow at a constant 7% rate. The weighted average cost of capital is WACC = 11%. Williamsburg currently holds $525,000 of nonoperating marketable securities. Its long-term debt is $1,250,000, but it has never issued preferred stock. Williamsburg has 50,000 shares of stock outstanding.

1. Calculate Williamsburgs value of operations.
2. Calculate the companys total value.
3. Calculate the estimated value of common equity.
4. Calculate the estimated per share stock price.

5. Wilson, Inc. is considering going public but is unsure of a fair offering price for the company. Before hiring an investment banker to assist in making the public offering, managers at Goff have decided to make their own estimate of the firms common stock value. The firms CFO has gathered data for performing the valuating using the free cash flow valuation model.

The firms weighted average cost of capital is 18%, and it has $1,000,000 of debt at market value and $750,000 of preferred stock at its assumed market value. The estimated free cash flows over the next 5-year, 2016 through 2020, are given below. Beyond 2020 to infinity, the firm expects its free cash flow to grow by 5% annually.

Year	FCF
2016	$245,000
2017	275,000
2018	335,500
2019	395,200
2020	515,000
2020	4,159,615

1. Estimate the value of Goff Industries entire company by using the free cash flow valuation model.
2. Use your finding in part a, along with the data provided above, to find Goff Industries common stock value.
3. If the firm plans to issue 150,000 shares of common stock, what is its estimated value per share?