Question

1.​Colgate-Palmolive Company has just paid an annual dividend of $ 1.13. Analysts are predicting dividends to grow by $ 0.16 per year over the next five years. After​ then, Colgate's earnings are expected to grow 6.3 % per​ year, and its dividend payout rate will remain constant. If​ Colgate's equity cost of capital is 7.9 % per​ year, what price does the​ dividend-discount model predict Colgate stock should sell for​ today?

The price per share is ​$ ( ) (Round to four decimal​ places.)

2.IDX Technologies is a privately held developer of advanced security systems based in Chicago. As part of your business development​ strategy, in late 2013 you initiate discussions with​ IDX's founder about the possibility of acquiring the business at the end of 2013. Estimate the value of IDX per share using a discounted FCF approach and the following​ data:

bullet ​Debt: $ 22 million

bullet Excess​ cash: $ 116 million

bullet Shares​ outstanding: 50 million

bullet Expected FCF in​ 2014: $ 46 million

bullet Expected FCF in​ 2015: $ 59 million

bullet Future FCF growth rate beyond​ 2015: 6 %

bullet ​Weighted-average cost of​ capital: 9.4 %

The enterprise value in 2013 is ​$ ( )million. ​ (Round to the nearest​ integer.)

The equity value is ​$ ( ) million. ​ (Round to the nearest​ integer.)

The value of IDX per share is ​$ ( ). ​ (Round to the nearest​ cent.)

Answer 1

(1) Current Dividend = D0 = $ 1.13 and Annual Growth in Dividends = $ 0.16 for a period of five years

D1 = 1.13 + 0.16 = $ 1.29, D2 = 1.29 + 0.16 = $ 1.45, D3 = 1.45 + 0.16 = $ 1.61, D4 = 1.61 + 0.16 = $ 1.77 and D5 = 1.77 + 0.16 = $ 1.93

Annual Dividend Growth Rate post Year 5 = g = 6.3 % and Equity Cost of Capital = R = 7.9 %

D6 = D5 x 1.063 = 1.93 x 1.063 = $ 2.05159

Current Stock Price = [1.29 / 1.079] + [1.45 / (1.079)^(2)] + [1.61 / (1.079)^(3)] + [1.77 / (1.079)^(4)] + [1.93 / (1.079)^(5)] + [2.05159 / (0.079 - 0.063)] x [1/(1.079)^(5)] = $ 94.0206

(2) Expected FCFF 2014 = $ 46 million , Expected FCFF 2015 = $ 59 million and Growth Rate of FCFF post 2015 = 6 %

Weighted Average Cost of Capital (WACC) = 9.4 %

Expected FCFF 2016 = FCFF 2015 x 1.06 = 59 x 1.06 = $ 62.54 million

Enterprise Value = [46 / (1.094)] + [59 / (1.094)^(2)] + [62.54 / (0.094 - 0.06)] x [1/(1.094)^(2)] = $ 1628.24 million ~ 1628 million

Debt = $ 22 millon and Excess Cash = $ 116 million

Equity Value = Enterprise Value - Debt + Excess Cash = 1628.24 - 22 +116 = $ 1722.24 million ~ $ 1722 million

Number of Shares Outstanding = N = 50 million

Value of IDX shares = 1722.24 / 50 = $ 34.4448 ~ $ 34.44