Question
In: Finance
You are asked to value Houston Inc.'s common equity. Assume that Houston Inc. is a constant...
You are asked to value Houston Inc.'s common equity.
Assume that Houston Inc. is a constant growth company with a
required rate of return of 13 percent whose last dividend (D0,
which was paid yesterday) was $2.00, and whose dividend is expected
to grow indefinitely at a 7 percent rate.
a. What is the firm’s expected dividend stream over the next 3
years?
b. What is the firm’s current stock price?
c. What is the stock's expected value 1 year from
now?
d. What are the expected dividend yield, the capital gains yield,
and the total return for Houston Inc. during the first year.
Solutions
Expert Solution
a.
D1=2.00*(1+7%)=2.14
D2=2.00*(1+7%)^2=2.29
D3=2.00*(1+7%)^3=2.45
b.
What is the firm’s current stock price
=(2.00*(1+7%))/(13%-7%)
=35.67
c.
the stock's expected value 1 year from now
=35.67*(1+7%)=38.17
d.
the expected dividend yield=(2*(1+7%))/35.67=6.00%
the capital gains yield=dividend growth rate=7.00%
the total return for Houston Inc.=the capital gains yield+the expected dividend yield=7%+6%=13.00%
jeff jeffy answered 2 years agoRelated Solutions
Assume that you have been asked to place a value on the fund capital (equity) of...
Assume that you have been asked to place a value on the fund
capital (equity) of BestHealth, a not-for-profit health maintenance
organization (HMO). Its projected profit and loss statements and
equity reinvestment (asset) requirements are as follows:
2016
2017
2018
2019
2020
Net Revenues
$50.00
$52.00
$54.00
$57.00
$60.00
Cash expenses
$45.00
$46.00
$47.00
$48.00
$49.00
Depreciation
$3.00
$3.00
$4.00
$4.00
$4.00
Interest
$1.50
$1.50
$2.00
$2.00
$2.50
Net Profit
$0.50
$1.50
$1.00
$3.00
$4.50
Asset Requirements
$0.40
$0.40
$0.40...
Assume that you are an equity analyst and you have been asked to generate a twelve...
Assume that you are an equity analyst and you have been asked to
generate a twelve month forward price target for ShopSmart Plc, a
retail company. You decide to use the discounted Free Cash Flow to
Firm (FCFF) valuation model. For the year just ended you have
collected the following information on ShopSmart PLC:
Net Income: £260 m
Sales: £2,600 m
Depreciation: £100 m
Investment in fixed capital: £180 m
Interest expense: £110 m
The working capital has increased from...
AFM Radio Inc.’s equity has a book value of $25 million and a market value of...
AFM Radio Inc.’s equity has a book value of $25 million and a
market value of $75 million. The market value of its debt is equal
to the book value, $50 million. The company’s pre-tax cost of debt
is 10%. The company’s stock has a beta of 1.5. Assume a corporate
tax rate of 30%, a risk-free rate of 5%, and an expected market
risk premium of 10%.
(a) What’s the company’s cost of equity, rE?
(b) What’s the company’s...
Common stock value—Constant growth McCracken Roofing, Inc., common stock paid a dividend of $1.41 per share...
Common stock value—Constant growth
McCracken Roofing, Inc., common stock paid a dividend of $1.41
per share last year. The company expects earnings and dividends to
grow at a rate of 5% per year for the foreseeable future.
a. What required rate of return for this stock would result in
a price per share of $28?
b. If McCracken expects both earnings and dividends to grow at
an annual rate of 11%, what required rate of return would result
in a...
You are an analyst in charge of valuing common stocks. You have been asked to value...
You are an analyst in charge of valuing common stocks. You have
been asked to value two stocks. The first stock AB Inc. just paid a
dividend of $12.00. The dividend is expected to increase by 40%,
35%, 25%, 20% and 10% per year respectively in the next five years.
Thereafter the dividend will increase by 5% per year in
perpetuity.
The second stock is CD Inc. CD will pay its first dividend of
$15.00 per share in 5 years....
your boss has asked you to estimate the intrinsic value of the equity for Google, which...
your boss has asked you to estimate the intrinsic value of the
equity for Google, which does not currently pay any dividends. You
are going to use an income approach and are trying to choose
between the free cash flow to equity (FCFE) approach and the
dividend discount model (DDM) approach. Which would be more
appropriate in this instance?why? What concerns would you have in
applying either of these valuation approaches to a company such as
this?
Eugene Inc.’s statement of stockholders’ equity on December 31, 2019 is as follows: Common stock, $1...
Eugene Inc.’s statement of stockholders’ equity on December 31,
2019 is as follows: Common stock, $1 par, 500,000 shares
authorized; 375,000 shares issued $375,000 Paid-in capital in
excess of par - Common stock 1,875,000 Retained earnings 780,000
Treasury stock, 40,000 shares (320,000) Total stockholders’ equity
$2,660,000
The following transactions occurred during 2020:
Apr 25 Issued 50,000 shares of common stock for $9 per
share.
Jun 15 Sold 10,000 shares of treasury stock for $11 per share.
Oct 24 Repurchased 15,000...
Assume that you have been asked to place a value on the acquisition of Briarwood Hospital....
Assume that you have been asked to place a value on the
acquisition of Briarwood Hospital. Its projected profit and loss
statements and retention requirements are shown below (in
millions):
Year 1
Year 2
Year 3
Year 4
Year 5
Net
revenues
$225.0
$240.0
$250.0
$260.0
$275.0
Cash
expenses
$200.0
$205.0
$210.0
$215.0
$225.0
Depreciation
$11.0
$12.0
$13.0
$14.0
$15.0
Earnings before interest and taxes
$14.0
$23.0
$27.0
$31.0
$35.0
Interest
$8.0
$9.0
$9.0
$10.0
$10.0
Earnings before...
MM Inc. is an all-equity firm (the firm value equals the value of equity). As the...
MM Inc. is an all-equity firm (the firm value equals the value
of equity). As the CEO of MM Inc., you are considering purchasing a
private jet for the firm. The private jet costs $12 million today
and will save $2 million (in today’s value) on travel expenses for
the firm over its life. You own 1% of MM's equity ownership. The
private benefits of the private jet to you are estimated to be
$800,000 in today’s value.
Suppose you...
MM Inc. is an all-equity firm (the firm value equals the value of equity). As the...
MM Inc. is an all-equity firm (the firm value equals the value
of equity). As the CEO of MM Inc., you are considering purchasing a
private jet for the firm. The private jet costs $12 million today
and will save $2 million (in today’s value) on travel expenses for
the firm over its life. You own 1% of MM's equity ownership. The
private benefits of the private jet to you are estimated to be
$800,000 in today’s value.
Suppose you...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- JAVA If a user inputs a specific number of rows, columns and sections for a rectangle...
- A stock costs $80 and pays a $4 dividend each year for three years. a) If...
- A solid cylinder, mass of 15 kg, is on a hill that is inclined at a...
- Discuss the difference between a)FAT, FAT32, NTFS, CDFS, etc., b)What make them diferent and why they...
- 2. Given the Instruction sets for Machine-1, Machine-2 and Machine-3, write programs to calculate: P= ((B×C)...
- Problem III. Suppose that, in a market of a certain good, there are firms that are...
- discusses the difference between public relations and advertising. Cite an organization or individual and give one...
ADVERTISEMENT