Question
Turbo Technology Computers is experiencing a period of rapid growth. Earnings and dividends are expected to grow at a rate of 15% during the next
Turbo Technology Computers is experiencing a period of rapid growth. Earnings and dividends are expected to grow at a rate of 15% during the next two years, at 13% in the third year, and at a constant rate of 6% thereafter. Turbos last dividend was $1.15, and the required rate of return on the stock is 12%
2. McCaffreys Inc. has never paid a dividend, and when the firm might begin paying dividends is not known. Its current free cash flow (FCF) is $100,000, and this FCF is expected to grow at a constant 7% rate. The weighted average cost of capital (WACC) is 11%. McCaffreys currently holds $325,000 of non-operating marketable securities. Its long-term debt is $1,000,000, but it has never issued preferred stock. McCaffreys has 50,000 shares of stock outstanding.
| 3a. Calculate McCaffrey's value of operations. | |||||||||
| Vop = | FCF(1+g) | = | = | $ | |||||
| WACC - g | |||||||||
| 3b. Calculate the company's total value. | |||||||||
| Total Value = | Value of Operations | + | Value of nonoperating assets | ||||||
| = | $ | + | $ | = | $ | ||||
| 3c. Calculate the estimated value of common equity. | |||||||||
| Value of equity = | Total value | - | Value of debt | ||||||
| = | $ | - | $ | = | $ | ||||
| 3d. Calculate the estimated per-share stock price. | |||||||||
| Price per share = | Value of Equity | Number of Shares | |||||||
| = | $ | $ | = | $ | |||||
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Understanding The Finance Of Welfare
Authors: Howard Glennerster
2nd Edition
1847421091, 978-1847421098
