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CHAPTER EXERCISESNAMESCORE:SECTION:DATE:PROBLEM SOLVING: Supply the answer for each requirement.Dividend Discount Model Constant Growth: dividend per share (DPS), dividend yield, capital gains yield and stock price computation:SGV Inc.: What is the expected dividend per share in year 1?DIV1=DIV01+g1DIV1=1.51+0.051DIV1=1.575What is the expected dividend per share in year 5?DIV5=DIV01+g5DIV5=1.51+.055DIV5=1.9144What is the price of the stock today (P0)?P0=div1rs-gP0=1.5750.12-0.05P0=22.50What is the price of the Stock after two years (P2)?P2=div3rs-gP2=1.575(1.05)20.12-0.05P2=24.81ORP2=P01+.052P2=22.51+.052P2=24.81What is the price of the stock after four years (P4)?P4=P21+.052P4=24.811+.052P4=27.35What is the expected dividend yield in year 1?ETR=Dividend Yield+Capital Gains/(loss) yieldDY= Div1PoDY= 1.57522.5 = 7%What is the expected capital gains yield in year 1? CG(l)Y= P1-P0P0 CG(l)Y= 23.625-22.522.5 CGlY= 5%-also equal to growth rate Where:P1=P01+g1P1=22.5(1.05)1P1=23.625If in an investor of SGV Inc. stock sold his shares at P25 per share in year 1 after receiving dividend:What is the dividend yield?ETR=Dividend Yield+Capital Gains/(loss) yieldDY= Div1PoDY= 1.57522.5 = 7%What is the capital gains yield?CG(l)Y= P1-P0P0 CG(l)Y= 25-22.522.5 CGlY= 11.11%Where; P1 is the new selling price.What is his total return from investment?ETR=Dividend Yield+Capital Gains/(loss) yieldETR=7%+11.11%ETR=18.11%Dividend Discount Model Declining Growth Stock: dividend per share (DPS) and stock price computation:AMV Inc. What is the expected dividend per share in year 1?DIV1=2.0What is the expected dividend per share in year 3?DIV3=DIV11+g2DIV3=2.01-0.052DIV3=2.00.952DIV3=1.805What is the price of the stock today (P0)?P0=div1rs-gP0=2.00.08-(-0.05)P0=15.38What is the price of the Stock after two years (P2)?P2=div3rs-gP0=1.8050.08-(-0.05)P0=13.88What is the price of the stock after four years (P4)?P4=P01+g4P4=15.38(0.95)4P4=12.53Dividend Discount Model Non-Constant Growth Stock: dividend per share (DPS) and stock price computation:SBC Management CorpWhat is the expected dividend per share in year 3?DIV1=DIV01+g1DIV1=1.01.201=1.20DIV2=DIV11+g1DIV2=1.21.201=1.44TERMINAL DATE ____________________________DIV3=DIV21+g1DIV3=1.441.051=1.512TV2=div3rs-gTV2=1.5120.12-0.05TV2=21.60What is the terminal value? 21.60What is the price of the stock today (P0)?P0=1.20(1.12)1+ 1.44(1.12)2+21.60(1.12)2=19.44What is the price of the Stock after one year (P1)?P1=0+ 1.44(1.12)1+21.60(1.12)1=20.57What is the price of the stock after three years (P3)?P2=0+0+21.601.120=21.60After the terminal date, the constant phase begins, hence, the shortcut format will now be applicable.P3=P01+g1P3=21.60(1.05)1P3=22.68Dividend Discount Model Non-Constant Growth Stock: required rate of return (r),dividend per share (DPS) and stock price computation:The Insecurity Bank (IB) What is the cost of equity (Ke) or required rate of return?Using CAPM,Rs=Rfr+Mrpβ Rs=3%+6%1.5Rs=12%What is the amount of Div1; Div2; Div3; Div4?DIV1=DIV01+g1DIV1=1.01.051=1.05DIV2=DIV11+g1DIV2=1.051.051=1.1025TERMINAL DATE ____________________________DIV3=DIV21+g1DIV3=1.10251.101=1.21275DIV4=DIV21+g2DIV4=1.10251.102=1.334025What is the terminal value (TV2)?TV2=div3rs-gTV2=1.212750.12-0.10TV2=60.6375What is IB’s common stock price today (P0)?P0=1.05(1.12)1+ 1.1025(1.12)2+60.6375(1.12)2=50.15625What is the price of the stock after 1 year (P1), 2 years (P2), three years (P3) and 4 years (P4)?P1=0+ 1.10251.121+60.63751.121=55.14P2=0+ 0+60.6375(1.12)0=60.6375P3=P21+g1P3=60.6375(1.10)1P3=66.70125P4=P31+g1P3=66.70125(1.10)1P3=73.37Corporate Valuation Model Constant Growth: Free Cash Flow (FCF), Weighted Average Cost of Capital (WACC), Market Value and Stock Price computation:Bank of Mama Corporation (BMC) What is the expected free cash flow this year?FCF1=[NOPAT+Depr+Amort. -Capex-Increase in WC]FCF1=[ EBIT (1-TR)+Depr+Amort. -Capex-Inc. in WC]FCF1= 900M 1-0.4+120M+30M -300M-180MFCF1=210MillionIt is FCF 1 because of the terms projected or expected. What is the expected free cash flow next year(year 2)?FCF1=FCF0 (1+g)1FCF2=FCF1 (1+g)1FCF2=210M(1+0.05)1=220.5MillionWhat is the weighted average cost of capital (WACC)?WACC=Kd 1-trDR+[ Ke ER]WACC=11.66% 1-0.440%+[ 15.336% 60%]WACC=12%What is the market value of BMC this year?MV Firm (asset) = FCF1Wacc-g MV Firm (asset) = 210 Milllion0.12-0.05=3, 000,000,000What is the intrinsic value (stock price) of BMC stock?MV Firm (asset) = 3,000,000,000MV (Debt and Preferred) = (1,000,000,000)MV Common Stocks 2,000,000,000÷WANOSO (shares OS) 5,000,000 sharesIntrinsic Value (Po)= P 400 per shareCorporate Valuation Model Non-Constant Growth: Free Cash Flow (FCF), Weighted Average Cost of Capital (WACC) Market Value and Stock Price computation:COA Corporation.What is the amount of free cash flow this year (FCF1), second year (FCF2), third year (FCF3), fourth year (FCF4)?FCF1=500,000FCF2=FCF11+g1FCF2=500,0001.201=600,000FCF3=FCF21+g1FCF3=600,0001.201=720,000TERMINAL DATE ____________________________FCF4=FCF31+g1FCF4=720,0001.061=763,200 How much is the weighted average cost of capital (WACC)?WACC=Kd 1-trDR+[ Ke ER]WACC=8.88% 1-0.430%+[ 12% 70%]WACC=9.998% or 10%How much is the Firm’s Terminal Value?TV2=FCF3wacc-gTV2=763,2000.10-0.06TV2=19,080,000How much is the Market Value of the Firm?MV Firm=500,000(1.10)1+ 600,000(1.10)2+ 720,000(1.10)3+19,080,000(1.10)3= 15,826,446How much is the Intrinsic Value of the Stock?MV Firm (asset) = 15,826,446,MV (Debt ) = (3,326,446)MV Equity = 12,500,000MV Preferred5,000,000MV Common Stocks 7,500,000÷WANOSO (shares OS) 250,000 sharesIntrinsic Value (Po)= P 30 per shareTRUE or FALSE: Write X if the statement is true while M if false. XM (Preferred stocks) XM (Non-participating shares) XM (company’s free cash flows.)XM (weighted average cost of capital.)M (overvalued.)M (is lower ) M (future value of the expected free cash flow at the end of that horizon.) M (readily be observed.)XXM (“sell” order) XXM (dividing the expected free cash flow ) XXMULTIPLE CHOICE QUESTIONS: Choose the letter of the best answer.THEORIES1. Which of the following situations depict an equilibrium:Market Value of a stock equals its Intrinsic ValueThe Expected Return of a stock equals its Required ReturnThe stock’s Growth Rate equals its Required ReturnThe yearly dividends shall be the same indefinitely.Statements i and iiStatements i, ii and iiiStatements i and ivNone of the above2. The change in growth rate is a factor ofmarket or economic conditionscompany-specific or firmboth market and company-specificthe stock’s Beta3. In an equilibrium condition and during a constant growth phase, the stock’s growth rate should equal thedividend yieldcapital gains yieldrequired returncorrected closing stock price4. The process of estimating the intrinsic value of a preferred stock generally shows an example ofan indefinitely increasing stocka perpetuityzero-growth stockboth B and C5. The weighted-average cost of capital or (WACC) serves as the equivalent of the cost of equity or required return in the corporate valuation model. Which of the following is not an element of WACC?Cost of common equity Cost of preferred equityCost of debtTax-adjusted cost of debt6. The terminal value of a non-constant growth stock should be discounted using which of the following periods?The last period (year) of the constant growth phase.The first period (year) of the non-constant growth phase.The midpoint period (year) of the non-constant growth phase.The last period (year) of the non-constant growth phase.7. Which of the following is not a common stockholder’s legal right and privileges?Right to elect the corporation’s directorsSubordinate to preferred shareholders in terms of dividend distributionRight to be elected as a director of the corporationRight to first receive the dividends before all other shareholders receive their share8. The considerations associated with stock valuation do not include:the expected future dividend performance of the stockthe estimated selling time and price of the stockthe exchange on which the stock is tradedthe market return on stocks of that type9. The market value of common stock is primarily based onthe firm's future earnings.book value.total assets.retained earnings.10. In the constant-growth model, the market return must be ____ the dividend growth rate in order for the formula price to be meaningful.less thanequal togreater thanproportional toThe analysis of estimating a stock’s intrinsic value is assumed to be performed by theOptimistic InvestorPerfect InvestorPessimistic InvestorMarginal InvestorA negative growth rate is also referred to asDeclining growthUpstream growthSupernormal growthZero growthComplete the sentence: The marginal investor is an investor who is at the margin and would be willing to _____ if the stock price was slightly lower or to sell if the price was slightly _____.sell; lowerhold; higherbuy; higherbuy; lowerThe considerations associated with stock valuation do not include:the expected future dividend performance of the stockthe estimated selling time and price of the stockthe exchange on which the stock is tradedthe market return on stocks of that typeYou are considering investing in ABC, Inc.'s stock which is selling at P45.95. Similar stocks return 16%. ABC's last dividend ABC was P4.50 and a 6% constant growth rate is anticipated. Should you purchase ABC, Inc.?No, because the stock is overpriced by P1.75No, because the stock is overpriced by P3.85Yes, because the stock is underpriced by P1.75Yes, because the stock is underpriced by P3.85PROBLEMS: (use at least five decimal places for present value computation)A. Petro-Max Corporation’s What is the amount of expected dividend today?0.700.750.801.75What is the stock’s expected dividend yield today?A. 2.8%B. 3.0%C. 3.2%D. 7.0%What is the expected stock price the next year?A. 26.75B. 27.50C. 28.63D. 30.00What is the expected stock price four years from today?A. 28.14B. 30.63C.32.77D.36.60B. During the past few years, Metro De Oro (MDO) Bank has retained, on anWhat is the market risk premium using CAPM?A. 4%B. 8%C. 12%D. 16%What is the required rate of return using CAPM?A.4%B. 8%C.12%D.16%What is the company’s current market price?A. 25B. 27.5C.30.25D. 32What is the expected dividend yield?A. 4.50%B. 4.95%C.5.45%D. 6.00%What is the expected earnings per share (EPS)?A. 5.0 : 1B. 5.5: 1C.6.0 : 1D. 6.5: 1What is the expected price earnings ratio (PER)?A. 5B. 5.7C.6D. 6.5C. GLOBAL Technology’s What is the GLOBAL Technology’s Beta?A. 1.0B. 1.06C. 1.25D. 2.0What is the expected dividend yield?A. 4.67%B. 5%C.5.35%D. 7.0%Determine the capital gains yield?A. 6%B. 6.65%C. 7%D. 7.33%What is the expected stock price three years from today?A. P42.8B. P45.80C. P 49D. 52.43D. UNION LAND Corporation’s financial information stated the following:What is the Earnings per share?A. P1 per shareB. P 3 per shareC. P 4 per shareD. P 5 per shareWhat is the market price per share?A. P5B. P 15C.P 20D.P 25What is the dividend yield?A. 21%B. 20%C.16%D. 10%What is the Plow back Ratio or retention ratio?A. 5% B. 10%C.15%D. 20%What is the expected growth rate?A. 5% B. 10%C.15%D.20%What is the expected rate of return?A. 21%B. 20%C.16%D. 10%Fil-Ham Life What is the terminal value?A. P 156.25B. P 171.875C. P 173.43D. P 214.84What is the present value of the cash flows under the supernormal phase?A. P 2.394B. P 3.391C.P 139.49D. P 174.36What is the present value of the cash flows under the constant phase?A. P 2.394B. P 3.394C.P 139.49D. P 174.36What is the stock price of Fil-Ham life today?A. P 141.88.B. P 142.88C. P 175.88D. P 176.88What is the stock price of Fil-Ham life after one year?A. 154.84B. 156.25C. 177.35D. 178.60What is the stock price of Fil-Ham life after two years?A. 156.25B. 157.81C.171.88D.173.44What is the stock price of Fil-Ham life after three years?A. 171.87B. 189.07C.190.78D. 192.52RAT Kim Eng. What is the market value of RAT Kim Eng using the corporate valuation model?A. P 625 MillionB. P 662. 5 MillionC. P 825 MillionD.P 855 MillionWhat is the estimated per-share price of RAT Kim Eng’s common stock today?A. 14.17B. 17.00C. 20.80D. 26.20Phil-Mining Corporation What is the Expected free cash flow of the firm (FCF1)?A. P 400 MillionB. P 380 MillionC. P140 MillionD. P 20 MillionWhat is the weighted average cost of capital (WACC)?A. 9.876%B. 9.998%C.12%D.13.73%What is the market value of the company?A.P 1.5 Billion B. P 3.0 BillionC. P 3.5 BillionD. P 9.5 BillionFrom the preceding number, if the market value of debt and preferred stock is P1 billion and the stock price is P62.50 per share, what is the number of outstanding shares?A. 31,350,000 sharesB. 32,000,000 sharesC. 40,000,000 sharesD.136,000,000 sharesPetcorn Corporation. The analyst determined that Petcorn’s free cash flow What is the market value of Petcorn Corporation using the corporate valuation model?A. P 925,018,782.95B. P 982,043,576.25C. P 1,012,043,576.25D. P 1, 110,043.576.25What is the estimated per-share price of Petcorn’s common stock today?A. P 15.50B. P 36.25C. P 39.10D. P 40.60What is the estimated per-share price of Petcorn’s common stock after 2 years?A. P 40.73B. P 41.45C. P 43.93D. P 45.96 North East Bank Corporation (NEBC) What is the required rate of return on equity?4.5%5.5%10%13.75%By how much will the stock price under dividend discount model be higher / (lower) than stock price under corporate valuation model?P 9.50 higherP 19.96 higherP (P9.50) lowerP (19.96) lower“THAT IN ALL THINGS, GOD MAY BE GLORIFIED”“Nothing is permanent in this world, except change” ................
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