9. Free cash flow valuation of stock.ALD Inc. is a growing firm with free cash flows increasing by 15 percent for the first two years and 10 percent for the next three years. After that period, the rate of growth of the cash flows will stabilize at 5 percent annually for the foreseeable future. Last year the cash flows were $11.2 million. The company has $40 million cash on its balance sheet and $100 million debt. Estimate the stock price if there are 100 million outstanding shares. The average cost of capital for the firm is 8 percent.

9. Free cash flow valuation of stock.ALD Inc. is a growing firm with free cash flows increasing by 15 percent for the first two years and 10 percent for the next three years. After that period, the rate of growth of the cash flows will stabilize at 5 percent annually for the foreseeable future. Last year the cash flows were $11.2 million. The company has $40 million cash on its balance sheet and $100 million debt. Estimate the stock price if there are 100 million outstanding shares. The average cost of capital for the firm is 8 percent.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter7: Common Stock: Characteristics, Valuation, And Issuance

Section: Chapter Questions

Problem 4P

See similar textbooks

Similar questions

YZ Inc. is experiencing rapid growth. Earnings and dividends are expected to grow at a rate of 17% during the next 2 years, at 15% the following year, and at a constant rate of 7% during Year 4 and thereafter. Its last dividend was $1.55, and its required rate of return is 12%. a. Calculate the value of the stock today. b. Calculate P1 and P2 (Prices for Year 1 and Year 2). c. Calculate the dividend and capital gains yields for Years 1, 2, and 3.
The analyst estimates that after three years the National Inc’s free cash flow will grow at a constant rate of 6% per year. The analyst estimates that the company’s WACC is 10%. The total market value of debt and preferred stock is P25,000 and there are 1,000 outstanding shares of common stock. What is the intrinsic value of the company’s common stock? a. P99.50 b. P84.34 c. P75.31 d. P112.22
An analyst is estimating the intrinsic value Harkleroad Technologies' stock. Harkleroad's free cash flow is expected to be $25 million this year, and grow at a constant rate of 7% a year. The company's WACC is 10%. Harkleroad has $150 million of long-term debt and $70 preferred stock, and 20 million outstanding shares of common stock. What is the estimated per-share price of Harkleroad Technologies' common stock?
Turbo Technology Computers is experiencing a period of rapid growth. Earnings and dividends are expected to grow at a rate of 15% during the next two years, at 13% in the third year, and at a constant rate of 6% thereafter. Turbo's last dividend was $1.15, and the required rate of return on the stock is 12%. Complete the following calculations: a.Calculate the value of the stock today. b. Calculate P1^ and P2^. c. Calculate the dividend yield and capital gains yield for Years 1, 2, and 3. 2. Kassidy's Kabob House has preferred stock outstanding that pays a dividend of $5 at the end of each year. The preferred sells for $50 a share. What is the stock's required rate of return? Assume the market is in equilibrium with the required return equal to the expected return. 3. McCaffrey's Inc. has never paid a dividend, and when the firm might begin paying dividends is not known. Its current free cash flow (FCF) is $100,000, and this FCF is expected to grow at a constant 7% rate. The…
Suppose that Domino’s Pizza, Inc. (DPZ) is selling for $305.00. Analysts believe that the growth rate for DPZ will be 20% per year for the next three years, 15% per year for the following two years, and thereafter the growth rate will be 8% indefinitely. DPZ’s most recent cash dividend per share was $5.00. The dividend will grow by the same rate as the company. Stockholders require a return of 15 percent on DPZ’s common stock. Required: Based on the above assumptions, determine the price of DPZ’s common stock. Explain whether an investor should buy the stock.
a). Tin-Tin Waste Management, Inc., is growing rapidly. Dividends are expected to grow at rates of 30 percent, 35 percent, 25 percent, and 18 percent over the next four years. Thereafter, management expects dividends to grow at a constant rate of 7 percent. The stock is currently selling at $48.83, and the required rate of return is 15.5 percent. Compute the dividend for the current year (D0). (Round intermediate calculations and final answer to 2 decimal places, e.g. 15.25.) Dividend $ ___________________ b).Tre-Bien, Inc., is a fast-growing technology company. Management projects rapid growth of 30 percent for the next two years, then a growth rate of 17 percent for the following two years. After that, a constant-growth rate of 8 percent is expected. The firm expects to pay its first dividend of $2.44 a year from now. If dividends will grow at the same rate as the firm and the required rate of return on stocks with similar risk is 22 percent, what is the current value…
IoT Inc., is in the business of measuring Southwest Water’s water demand in Exeter. At the end of the year IoT is expected to pay a $4 dividend per share. It reinvests 40% of its earnings and is growing at 4% a year. a. Assume that IoT continues on this growth trend. What is the expected longrun rate of return from purchasing the stock at $100? b. What part of the price of $100 is attributable to the present value of growth opportunities? Briefly explain your calculations.
Shell is experiencing rapid growth. Earnings and dividends are expected to grow at a rate of 15% during the next 2 years, at 13% the following year, and at a constant rate of 6% during Year 4 and thereafter. Its last dividend was $1.15, and its required rate of return is 12%. b) Find the PV of the firm’s stock price at the end of Year 3. e) Calculate the value of the stock two years from today. f) Calculate the dividend and capital gains yields for Years 1, 2, and 3. Dividend Yield Year 1 = % Capital Gains Yield Year 1 = % Dividend Yield Year 2 = % Capital Gains Yield Year 2 = % Dividend Yield Year 3 = % Capital Gains Yield Year 3 = %
The stock of Nogro Corporation is currently selling for $10 per share. Earnings per share in the coming year are expected to be $2. The company has a policy of paying out 50% of its earnings each year in dividends. The rest is retained and invested in projects that earn a 20% rate of return per year. This situation is expected to continue indefinitely. a. Assuming the current market price of the stock reflects its intrinsic value as computed using the constant-growth DDM, what rate of return do Nogro’s investors require?b. By how much does its value exceed what it would be if all earnings were paid as dividends and nothing were reinvested?c. If Nogro were to cut its dividend payout ratio to 25%, what would happen to its stock price?d. What if Nogro eliminated the dividend?
A company just paid a dividend for $0.58 per share. Dividends are expected to grow by 20% in the first year and then 15% in the 2nd year. From Year 3 dividends are expected to grow at a constant rate of 5.6% indefinitely. If the required rate is 8.3%. What is the intrinsic value of the stock today?
John Adam, an analyst with T.D. Wyse Securities, is trying to evaluate Company A’s target stock price per share. Free cash flow (FCF) estimates for the next 3 years are -$2, $12, and $18 million, after which the FCF is expected to grow at 4%. The overall firm cost of capital is 10%. The firm has $40 million in debt and has 16 million shares of stock. What is the estimated value per share? Show your calculations.
Using the variable growth model, calculate the estimated stock value of the organization. The organization's most recent annual dividend payment was $0.50 per share. Dividends are expected to increase by 5% annually over the next 4 years. At the start of the 5th year, dividend growth rate is expected to slow down to 3% annually for the foreseeable future. Required return on the stock is estimated to be at 10% per annum. Market Value of All Debt: $ 1 millionMarket value of Preferred Shares = $ 1 million# of shares of common stock outstanding = 200,000