Question

Please answer all following short questions for Upvote.

1. a) Calculate the price to sales ratio when the payout ratio is 35% and net profit margin is 2.5% with a growth rate of 3%and required return on the part of investors is 10%.

b) If sales rise by $0.65 per share, what would be the change in stock price?

2. a) Calculate price to book value if the payout ratio is 30%, ROE is 25% growth in earnings is 4% and the required return is 9%.

b) If the book value rises by $2, what would be the corresponding change in stock price?

3) Calculate the fair value based on the following information:

       Current dividend = $1.50

      Normal growth rate = 4%

      Super growth rate = 18%

      Duration of the super growth rate = 10 years

      Required return 11%    

4. Use the “FED Model” for calculating the price with the following.

EPS of $6.50; bond yield of 3.5% (AA quality); growth in earnings of 3%.

Answer 1

1) Price = D1 / ( Ke - g )

Dividing bothe the sides by Sales per Share

Price / Sales = (Profit Margin * Payout ratio * (1+g) ) / ( Ke - G )

= (2.5% * 35% * (1 + 3 %) ) / (10%-3%) = 0.1288

b) If sales increase by $ 0.65 price of the stock would increase by = 0.65 * 0.1288 = $ 0.0837

2) Price / Book Value = ( ROE - g ) / (Ke - g ) = ( 25% - 4% ) / ( 9% - 4% ) = 4.2

If book value incease by $2 , price of the stock would increase by , 4.2 * $ 2 = $ 8.4

3)

D0	= 1.5
D1	= 1.77
D2	= 2.09
D3	= 2.46
D4	= 2.91
D5	= 3.43
D6	= 4.05
D7	= 4.78
D8	= 5.64
D9	= 6.65
D10=	7.85
	D11 = 8.16 P10 = D11 / (Ke - g) 8.16/ ( 11% - 4% ) 116.5714

PVIF @ 11% 0.90 0.81 0.73 0.66 0.59 0.53 0.48 0.43 0.39 0.35 0.32
Multiplying and then PVIF with the cash flows
Fair Value = $ 57.55 4. FED Model = E1/ P = Bond Yield 6.50 (1.03) / 3.5%=P
$ 191.29