Question

In: Finance

1) Bank of America has a preferred stock dividend of $3.76. The stock is trading for...

1) Bank of America has a preferred stock dividend of $3.76. The stock is trading for $62.66. What is the expected return of the preferred stock?

2) A company had free cash flows of $370 million last year. Free cash flows are expected to grow at 2.4% per year. The WACC for the firm is 7.1%. They currently have $7.9 billion in debt outstanding, and have 189 million common stock outstanding. The company does not have any preferred stock. What is the estimate of the stock price based on the firm valuation model?

3) A company had free cash flows of $522 million last year. Free cash flows are expected to grow at 3.8% per year. The WACC for the firm is 8.9%. They currently have $6.9 billion in debt outstanding, and have 211 million common stock outstanding. The company has 75 million preferred stock outstanding, that currently trade at $36. What is the estimate of the stock price based on the firm valuation model?

Solutions

Expert Solution

Ans-1)

Preferred Stock Dividend = $3.76

Preferred Stock Price = $62.66

Expected Return of the Preferred Stock = Preferred Stock Dividend/Preferred Stock Price

=$3.76/$62.66

= 6%

Ans- 2)

FCF last year(FCF0) = $370 million

Growoth rate(g) = 2.4%

WACC = 7.1%

Calculating the Enterprise Value(EV) of firm:-

EV = $8061.28 millions

Enterprise Value = Value of equity + Value of Debt

$8061.28 millions = Value of equity + $7900 million

Value of equity = $161.28 millions

No of shares oustanding = 189 million

Firm's share price as per Enterprise Value = $161.28 millions/189 millions shares

= $0.8533 per share

So, the estimate of the stock price based on the firm valuation model is $0.8533 per share

Ans- 3)

FCF last year(FCF0) = $522million

Growoth rate(g) = 3.8%

WACC = 8.9%

Calculating the Enterprise Value(EV) of firm:-

EV = $10,624.24 millions

Value of Preferred Stock = No of Shares Outstanding*Share price

=75 million*$36

=$2700 million

Enterprise Value = Value of equity + Value of Debt + Value of Preferred Stock

$10,624.24 millions = Value of equity + $6900 million + $2700 million

Value of equity = $1024.24 millions

No of shares oustanding = 211 million

Firm's share price as per Enterprise Value = $1024.24 millions/211 millions shares

= $4.8542 per share

So, the estimate of the stock price based on the firm valuation model is $4.8542 per share

jeff jeffy answered 1 year ago

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