Quantitative Problem 1: Hubbard Industries, just paid a common dividend, D0, of $1.00. It expects to grow at a constant rate of 44 per vear. if investors require a 12% return on equity, what is the current price of Hubbard's common stock? Do not round intermediate calculations. Round your answer to the nearest cent. $ per share Zero Growth Stocks: The constant growth model is sufficiently general to handle the case of a zero growth stock, where the dividend is expected to remain constant over time. In this situation, the equation is: P0=r0D Note that this is the same equation developed in Chapter 5 to value a perpetuity, and it is the same equation used to value a perpetual preferred stock that entities its owners to regular, fixed dividend payments in perpetuity. The valuation equation is simply the current dividend divided by the required rate of return. Quantitative Problem 2: Carlysle Corporation has perpetual preferred stock outstanding that pays a constant annual dividend of s1.80 at the end of each year. If investors require an 7% return on the preferred stock, what is the price of the firm's perpetual preferred stock? Round your answer to 1 nearest cent. $ per share Nonconstant Growth Stocks: For many companies, it is not appropriate to assume that dividends will grow at a constant rate. Most firms go through life cycles where they experience different growth rates during different parts of the cycle. For valuing these firms, the generalized valuation and the constant growth equations are combined to arrive at the nonconstant growth valuation equation: P0=nn rate of return. Quantitative Problem 2: Carlyste Corporation has perpetual preferred stock outstanding that pays a constant annual dividend of st. 10 at the end of each year. If investors require an 7% return on the preferred stock, what is the price of the firm's perpetual preferred stock? Round your antwint to the nearest cent. s. per share Nonconstant Growth Stocks: For many companies, it is not appropriate to assume that dividends will grow at a constant rate. Most firms po through life cycles where they experience different growth rates during different parts of the cycle. For valuing these firms, the generalized valuation and the constant growth equations are combined to arrive at the nonconstant growth valuation equation: Bosically, this equation calculates the present value of dividends received during the nonconstant growth period and the present value of the stocks horizon value, which is the value at the horizon date of all dividends expected thereafter. Quantitative Problem 3: Assume today is December 31, 2019. Imagine Works Ine. Just paid a dividend of $1.20 per share at the end of 2019. The dividend is expected to grow at 18% per year for 3 years, after which time it is expected to grow at a constant rate of 5.5% annually. The company cost of equity ( r3) is 10%. Using the dividend growth model (allowing for nonconstant growth), what should be the price of the company's stock tod (December 31,2019 )? Do not round intermediate calculations. Round your answer to the nearest cent. \$ per share Quantitative Problem 1: Assume today is December 31, 2019. Barrington Industries expects that its 2020 after-tax operating income [EBrT (1 - T)] Will be $440 million and its 2020 depreciation expense will be $65 milion. Barrington's 2020 gross capital expenditures are expected to be $120 muition annually. Assume that its free cash flow occurs at the end of each year. The firm's weighted average cost of capital is 8 . 8%; the market value of the company's debt is $2.6 billion; and the company has 180 million shares of common stock outstanding. The firm has no preferred stock on its balance sheet and has no plans to use it for future capital budgeting projects, Aiso, the firm has zero non-operating assets: Using the corporate valuation model, what should be the company's stock price today (December. 31, 2019)? Do not round intermediate calculations. Round your answer to the nearest cent. nearest cent. Quantitative Problem 2: Hadley Inc, forecasts the vear-end free cash flows (in millions) shown below. market-.. meiyned average cost of capital is 9%, and the FCFs are expected to continue growing at a 4% rate after Year 5 . The firm has $26 million of market-value debt, but it has no preferred stock or any other outstanding claims. There are 21 million shares outstanding. Also, the firm has zero nons per share According to the valuation models developed in this chapter, the value that an investor assigns to a share of stock is dependent on the length of time the investor plans to hold the stock. The statement above is Conclusions Analysts use both the discounted dividend model and the corporate valuation model when valuing mature, dividend-paying firms; and they generally use the corporate model when valuing divisions and firms that do not poy dividends. In principle, we should find the same intrinsic value using either model, but differences are often observed. Even if a company is paying steady dividends, much can be learned from the corporate model; so analysts today use it for all types of valuations. The orocess of projecting future financial statements can reveal a great deal about a company's operations and financing needs, Also, such an analysis can rovide insights into actions that might be taken to increase the company's value; and for this reason, it is integral to the planning and forecasting rocess
