Turbo Technology Computers is experiencing a period of rapid growth. Earnings

3-1 Homework: Stock Valuation Calculations This homework submission should include all calculations, completed on the designated tab of the Homework Student Workbook, and a document explaining the implications of your findings for the business or business transaction. After reading the assigned chapters, address the following questions: 1. 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. Turbo's last dividend was $1.15, and the required rate of return on the stock is 12%. Complete the following calculations: a. Calculate the value of the stock today. b. Calculate P1^ and P2^. c. Calculate the dividend yield and capital gains yield for Years 1, 2, and 3. 2. Kassidy's Kabob House has preferred stock outstanding that pays a dividend of $5 at the end of each year. The preferred sells for $50 a share. What is the stock's required rate of return? Assume the market is in equilibrium with the required return equal to the expected return. 3. McCaffrey's 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%. McCaffrey's currently holds $325,000 of non-operating marketable securities. Its long-term debt is $1,000,000, but it has never issued preferred stock. McCaffrey's has 50,000 shares of stock outstanding. b. c. d. e. Calculate the following: McCaffrey's value of operations The company's total value The estimated value of common equity The estimated per-share stock price Assignment 3-1, Question 1 1a. Calculate the value of the stock today: 1. Calculate the PV of the dividends paid during the supernatural growth period: $ 1.15 D1 = D2 = D3 = % 1.15 x x x PV of Dividends = = = = + 2. Find the PV of Turbo's stock price at the end of Year 3: P3 ^ = ____D4____ rs-g = __ _D3(1+g)______ rs-g = = PV of P3^ = = $ 3. Sum the two components to find the value of the stock today: Value of current stock (P0) = $ + 1b. Calculate P1^ and P2^. P1 ^ = $ + $ + P2 ^ = $ + $ = 1c. Calculate the dividend yields and capital gains yield for Years 1, 2, and 3. Year 1 2 3 Dividend Yield $1.3225/$25.23 5.24% + + + + natural growth period: $ 1.3225 + $ $ = = $ = $ $ $ Capital Gains Yield ($26.93 - $25.23) / $25.23 6.74% = Total Return 12% Assignment 3-1, Question 2 rps = % Assignment 3-1, Question 3 3a. Calculate McCaffrey's value of operations. FCF(1+g) WACC - g Vop = = 3b. Calculate the company's total value. Total Value = Value of Operations =$ + Value of nonoperating asse + $ 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 $ = $ = $ = $ = $ lue of nonoperating assets Value of debt Number of Shares