Solve and explain each section Cindy is preparing a valuation of Schlomberg Services Corp. using a multiple-stage FCFE valuation model with the following estimates. The FCFE per share for the current year is $1.75. The FCFE is expected to grow at 15 percent for the next four years, then at 9 percent annually for the following three years, and finally at a constant growth rate of 5 percent starting the eighth year. Schlomberg Services estimated beta is 1.25, and Troy believes that the current market conditions dictate a 2.05% risk free rate and a 10% expected market return. The following are five independent questions. a. Given Roy's assumptions and approach, estimate the value of a share of Schlomberg Services. b. If the terminal growth rate is projected to be 6%, rather than 5%, re-estimate the value of a share of Schlomberg Services. Does this new estimate make sense? c. If the expected market return is assumed to be 9%, rather than 10%, re-estimate the value of a share of Schlomberg Services. Does this new estimate make sense? d. If the systematic risk coefficient (beta) of the stock increases from 1.25 to 1.40, re-estimate the value of a share of Schlomberg Services. Does this new estimate make sense? e. If Schlomberg Services' estimated beta is statistically insignificant, suggest an alternative approach to arrive at the required rate of return (k) on the stock and use this new k to re-estimate the value of a share of Schlomberg Services. Assume Schlomberg Services' bonds outstanding are traded at a yield of 6.15% and the risk premium required for SchlombergServices' equity shareholders over bond holders is 4.5% Solve and explain each section Cindy is preparing a valuation of Schlomberg Services Corp. using a multiple-stage FCFE valuation model with the following estimates. The FCFE per share for the current year is $1.75. The FCFE is expected to grow at 15 percent for the next four years, then at 9 percent annually for the following three years, and finally at a constant growth rate of 5 percent starting the eighth year. Schlomberg Services estimated beta is 1.25, and Troy believes that the current market conditions dictate a 2.05% risk free rate and a 10% expected market return. The following are five independent questions. a. Given Roy's assumptions and approach, estimate the value of a share of Schlomberg Services. b. If the terminal growth rate is projected to be 6%, rather than 5%, re-estimate the value of a share of Schlomberg Services. Does this new estimate make sense? c. If the expected market return is assumed to be 9%, rather than 10%, re-estimate the value of a share of Schlomberg Services. Does this new estimate make sense? d. If the systematic risk coefficient (beta) of the stock increases from 1.25 to 1.40, re-estimate the value of a share of Schlomberg Services. Does this new estimate make sense? e. If Schlomberg Services' estimated beta is statistically insignificant, suggest an alternative approach to arrive at the required rate of return (k) on the stock and use this new k to re-estimate the value of a share of Schlomberg Services. Assume Schlomberg Services' bonds outstanding are traded at a yield of 6.15% and the risk premium required for SchlombergServices' equity shareholders over bond holders is 4.5%
