Question

1.)

FIN3100 is expected to pay a dividend of $3.00 per share one year from today. FIN3100 required rate of return is r_s = 7%. If the expected growth rate is 5%, at what price should the stock sell?

B.)FIN3100 just paid a dividend of $6.00, i.e., D₀ = $6.00. The dividend is expected to grow by 100% during Year 1, by 50% during Year 2, and then at a constant rate of 7% thereafter. If Silva's required rate of return is r_s = 12%, what is the value of the stock today?

C.) FIN3100 doesn't pay any dividends and it has no plans to pay dividends in the near future. The pension fund manager has estimated FIN3100's free cash flows for the next 3 years as follows: $2.2 million, $2.7 million, and $4.9 million. After the third year, free cash flow is projected to grow at a constant 6%. Calvert's WACC is 10%, the market value of its debt and preferred stock totals $11 million, and it has 2 million shares of common stock outstanding. What is an estimate of FIN3100's price per share?

Answer 1

A) Given D1=$3

Value of the Share=Dividend1/(required rate-growth rate)

=$3/(7%-5%)=$3/2%

=$150

Value of the Share=$150

B) Given D0=$6.0

D1=$6.0*(1+100%)=$12

D2=$12*(1+50%)=$18

D3=$18*(1+7%)=$19.26

Terminal value at year2=D3/(required rate-growth rate)=19.26/(12%-7%)=$385.2

Value of the Share=(D1/(1+12%))+((D2+Terminal value at Year2)/(1+12%)^2)

=(12/1.12)+(403.2/1.12^2)

=10.71+321.43

=$332.14

C) Free cashflow1 (FCF1)=$2.2 million

FCF2=$2.7 million

FCF3=$4.9 million

FCF4=$4.9*(1+6%)=$5.194 million

Terminal value at Year3=FCF4/(WACC-growth rate)=5.194/(10%-6%)=$129.85 million

Value of the firm=(FCF1/(1+10%))+(FCF2/(1+10%)^2)+(FCF3+Terminal value)/(1+10%)^3

=(2.2/1.1)+(2.7/1.1^2)+((4.9+129.85)/1.1^3)

=2+2.23+101.24

=$105.47 million

Value of the equity=Value of the firm-Value of the debt&preferred stock=$105.47-$11=$94.47 million

Equity price per share=Value of the equity/Outstanding shares=$94.47 million/2 million=$47.24