Valuation Problems: Stocks, Bonds, and Other Investments



Stock Valuation Problems

1. Calculate the value (i.e., stock price) of a stock given the following information: Current dividend (time period 0) = $1, growth rate of dividend = 4% per year, PE ratio = 15, EPS = $1, and required return equals 10%.

a. Solve using the Gordon Growth Model

b. Solve using the PE ratio

2.     Calculate the value (i.e., stock price) of the following stock.  The required return is 9.5%.  The dividend growth rate = 7%.  The dividend one period out is $2.76. The PE ratio = 20. The EPS equals $5.00.

a. Use the Gordon Growth model.

b. Use the PE ratio.

3.  The average PE ratio for semiconductor stocks is 20.  Triquint Semiconductor (TQNT) has average risk and growth prospects compared to the rest of the industry.  If the company has Earnings Per Share of $2.00, what would be a fair stock price?  If the company has 140,000,000 shares outstanding, what would be a fair market capitalization (aka market cap) for TQNT.  What was Triquint's Net Income?

4. What are the limitations of the Gordon Growth Model to determine the fair value of a stock?

5. What are the limitations of using the PE Ratio to determine a fair value for a stock?

6. Using the prior problems, explain how capital budgeting decisions can increase or decrease the value of a stock.

Solutions

1a. Solution: $17.33

1b. Solution: $15.00 

2a.  Solution:  $110.40-- $2.76/(.095-.07)

2b. Solution: $100.00

3. Solution:  $40 per share; $5.6 billion market cap; $280,000,000 Net Income

 

 

 

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