Question

1. Answer the following questions. What is the estimated (predicted) rate of return of the stock today?

** Thames Inc.'s last dividend was $2 per share. The dividend is expected to grow at 5% per year.

** The stock currently sells for $26.25 per share.

Select one:

a. 13.0%

b. 16.7%

c. 5.2%

d. 12.6%

e. 11.0%

2. Continued from previous question.  What is the expected price of the stock one-year later?

** Thames Inc.'s last dividend was $2 per share. The dividend is expected to grow at 5% per year.

** The stock currently sells for $26.25 per share.

Select one:

a. $28.54

b. $27.56

c. $23.58

d. $25.75

e. $27.00

3. Answer the following questions.

Analysts project the following free cash flows (FCFs) for Ezzell Corporation during the next 3 years, after which FCF is expected to grow at a constant 9% rate.

Ezzell’s WACC is 15%. Ezzell has $200 in debt and 50 shares of stock.

Time	Year 0	Year 1	Year 2	Year 3	Year 4
FCF		-$50	$60	$35	??

What is Ezzell’s value today?

Select one:

a. $535

b. $933

c. $561

d. $729

e. $443

4. Continued from previous questions.  What should be the current price of Ezzell’s stock?

Select one:

a. $14.67

b. $9.22

c. $13.22

d. $4.86

e. $11.22

Answer 1

Question 1:

Option a is correct

g = growth rate = 5%

Current stock price = $26.25

Current dividend = D0 = $2.00

Expected dividend = D1 = D0*(1+g) = $2.00 * (1+5%) = $2.10

Let Return of stock be r

Current Stock price = D1 / (r-g)

$26.25 = $2.10 /(r-5%)

(r-5%) = 0.08

r = 13%

Therefore, required return of the stock is 13%

Question 2:

Option b is correct

Required return = r = 13%

g = growth rate = 5%

D2 = D1*(1+g) = $2.1 * (1+5%) = $2.205

Expected stock price in one year = D2 /(r-g)

= $2.205 / (13%-5%)

= $27.5625

Therefore, Expected stock price in one year is $27.56

Quesiton 3:

Option e is correct

g = growth rate = 9%

r = required return = WACC = 15%

FCF1 = -$50

FCF2 = $60

FCF3 = $35

FCF4 = FCF3*(1+g) = $35*(1+9%) = $38.15

Horizon value at the end of year 3 = FCF4 / (r-g)

= $38.15 / (15%-9%)

= $635.833333

Ezzel's value today = [FCF1 / (1+r)^1] + [FCF2 / (1+r)^2] + [FCF3 / (1+r)^3] + [Horizon value / (1+r)^3]

= [-$50 / (1+15%)^1] + [$60 / (1+15%)^2] + [$35 / (1+15%)^3] + [$635.833333 / (1+15%)^3]

= [-$50 / 1.15] + [$60 / 1.3225] + [$35 / 1.520875] + [$635.833333 / 1.520875]

= -$43.478261 + $45.36862 + $23.013068 + $418.070738

= $442.974165

Therefore, Ezzel's value today is $443

Question 4:

Option d is correct

Ezzel's value today = $443

Debt value = $200

Ezzel's equity value = $443 - $200 = $243

Shares Outstanding = 50

Share price today = Ezzel's equity value / Shares Outstanding = $243 / 50

= $4.86

Therefore, Share price today is $4.86