Unit 2.2 Assignment: Individual Problems \#1 Due Date: 11:59 pm EST Sunday of Unit 2 Points: 100 Overview: In this assignment, you will solve the problems below. Instructions: For this assignment, you apply valuation models in Chapters 7 and 8 to calculate stock price and measure compary valuation. 1. Constant growth dividend model For Post Inc., the required rate of return is 12% and the growth rate is 7%. The expected dividend at the end of 2020 is $2.15. a) Compule the present value of Post's stock price with the appropriate assumptions. b) If the required rate of return and the dividend remain the same, but the growth rate increases up to 8 percent, what wil happen with the stock price? Explain the reason for the change. c) If the dividend and the growth rate remain the same, but the required rate of return increases to 14%, what will happen to the stock price? Explain the reason for the change. 2. P/E ratio analysis For the period 2010 - 2019, the average high and low P/E for Post lnc. is 15.25 and 10 . 25 , respectively. a) Assume that analysts determine that Post Inc.'s P/E ratio is 2020 should be 7 percent above the average high Post Inc. PJE ratio for the last 10 years. If the projecled earnings per share are $2.15 for 2020 , what would be the stock price? b) Assume that analysts determine that Post Inc.'s P/E ratio is 2020 should be 15 percent below the awerage low Post Inc. PIE for the last 10 years. What would the stock price be based on the anticipated earnings per share of $1.50 ? 3. Combining Du Pont analysis with P/E ratios Assume you are analyzing two slocks in the travel and leisure industry. You intentionally assign a P/E of 20 to the average firm in the industry. However, you will assign a 25 percent premium to the P/E of a company that uses conservative financing in its capital structure. This is because of the highly cyclical nature of the industry. Two firms in the industry have the following financial data: a) Compule return on stockholders' equity for esch firm. Use the Du Pont Method of analysis. Which is higher? b) Compule earnings per share for each company. Which is higher? c) Applying the 20 percent premium to the PIE ratio of the firm with the more conservative financial structure and the industry P/E rafio of the other firm, which firm has the higher stock price valuation? Requirements: - Answer each question fully. - You must show all of your work to receive full credit. - Submit your answers in a Word or Excel document. Be sure to read the criteria below by which your work will be evaluated before you write and again after you write. Unit 2.2 Assignment: Individual Problems \#1 Due Date: 11:59 pm EST Sunday of Unit 2 Points: 100 Overview: In this assignment, you will solve the problems below. Instructions: For this assignment, you apply valuation models in Chapters 7 and 8 to calculate stock price and measure compary valuation. 1. Constant growth dividend model For Post Inc., the required rate of return is 12% and the growth rate is 7%. The expected dividend at the end of 2020 is $2.15. a) Compule the present value of Post's stock price with the appropriate assumptions. b) If the required rate of return and the dividend remain the same, but the growth rate increases up to 8 percent, what wil happen with the stock price? Explain the reason for the change. c) If the dividend and the growth rate remain the same, but the required rate of return increases to 14%, what will happen to the stock price? Explain the reason for the change. 2. P/E ratio analysis For the period 2010 - 2019, the average high and low P/E for Post lnc. is 15.25 and 10 . 25 , respectively. a) Assume that analysts determine that Post Inc.'s P/E ratio is 2020 should be 7 percent above the average high Post Inc. PJE ratio for the last 10 years. If the projecled earnings per share are $2.15 for 2020 , what would be the stock price? b) Assume that analysts determine that Post Inc.'s P/E ratio is 2020 should be 15 percent below the awerage low Post Inc. PIE for the last 10 years. What would the stock price be based on the anticipated earnings per share of $1.50 ? 3. Combining Du Pont analysis with P/E ratios Assume you are analyzing two slocks in the travel and leisure industry. You intentionally assign a P/E of 20 to the average firm in the industry. However, you will assign a 25 percent premium to the P/E of a company that uses conservative financing in its capital structure. This is because of the highly cyclical nature of the industry. Two firms in the industry have the following financial data: a) Compule return on stockholders' equity for esch firm. Use the Du Pont Method of analysis. Which is higher? b) Compule earnings per share for each company. Which is higher? c) Applying the 20 percent premium to the PIE ratio of the firm with the more conservative financial structure and the industry P/E rafio of the other firm, which firm has the higher stock price valuation? Requirements: - Answer each question fully. - You must show all of your work to receive full credit. - Submit your answers in a Word or Excel document. Be sure to read the criteria below by which your work will be evaluated before you write and again after you write
