4. Deployment Specialists pays a current (annual) dividend of $1.
00 and expected to
grow at 20% for 2 years and then at 4% thereafter. If the required return for
Deployment Specialists is 8.5%, what is the intrinsic value of Deployment
Specialists stock ?
Chuyên gia triển khai trả cổ tức hiện tại (hàng năm) là $ 1,00 và dự kiến sẽ tăng
trưởng ở mức 20% trong 2 năm và sau đó là 4% sau đó. Nếu lợi nhuận cần thiết cho
Chuyên gia triển khai là 8,5%, thì giá trị nội tại của cổ phiếu Chuyên gia triển khai là
bao nhiêu?
The given information -
Present dividend ( D0 ) - $1
Dividend growth rate for the first 2 years (G1 ) - 20%
after 2 years it is ( G2)- 4%
Required return for specialist ( R ) - 8.5%
Here for calculating the intrinsic value, the first thing to do would be to take out
the dividend for the year 1 and 2 , so to calculate the formula used would be -
Dividend for year 1 = D0 X ( 1+G1)
= $1 X ( 1 + 20%)
= $1.20
Dividend for year 2 = D0 X ( 1+G1)
= $1.20 X ( 1 + 20%)
= $1.44
After this the next thing to do is to take out terminal value , were we will use
the growth rate of 4%
= Dividend for second year x (1+G2) / ( R - G2)
= $1.44 X ( 1 + 4% ) / (8.5% - 4%)
= $33.28
Now we will calculate the intrinsic value with the formula ,
Dividend year 1 / (1+ R)^1 + (Dividend year 2 + Terminal value) / (1+R)^2
= $1.20 / (1+8.5%) + $1.44 + $33.28 / (1+8.5%)
= $1.1060 + $29.4931
= $30.599
= $30.60
3.If a security is underpriced (i.e., intrinsic value > price), then what is
the relationship between its market capitalization rate and its expected
rate of return? (LO 13-2)
Intrinsic value → individuals assessment of true worth of stock.
Market capitalization rate (k) → required rate of return for a stock.
Determined from CAPM
k=rf+β[E(rm)−rf]−risk premium
If intrinsic value of the stock = price
Then market capitalization rate = expected rate of return
If stock is undervalued, the investors expected rate of return is greater
than k.
5. Jand, Inc., currently pays a dividend of $1.22, which is expected
to grow indefinitely at 5%. If thecurrent value of Jand’s shares
based on the constant-growth dividend discount model is $32.03,
whatis the required rate of return?
∴v0=D0×(1+g)/(k−g) $32.07=$1.22(1+0.05)/(k−0.05)
Constant growth DDM formula is Intrinsic valuev0
Solving for k gives, k = 0.089994 or 8.9994%
7. Tri-coat Paints has a current market value of $41 per share with
earnings of $3.64. What is thepresent value of its growth
opportunities (PVGO) if the required return is 9%?
Tri-coat paints has a current market value of $41 per share
They also have an earning of $3.64
The required return is 9%
= 9/100
= 0.09
Therefore, the present value of its growth opportunities can be calculated as
follows
= $41-($3.64/0.09)
= $41-40.44
= $0.56
Hence the present value of its growth opportunities is $0.56
6. A firm pays a current dividend of $1 which is expected to grow at
a rate of 5% indefinitely. If current value of the firm’s shares is $35, what
is the required return applicable to the investment based on the
constant-growth dividend discount model (DDM)?
We know that
Value of stock = Next year dividend ÷ (Required rate of return - growth
rate)
where,
Next year dividend would be
= $1 + $1× 5%
= $1 + 0.05
= $1.05
The other items rate would remain same
Now put these values to the above formula
So, the value would equal to
$35 = $1.05 ÷ (Required rate of return - 5%)
(Required rate of return - 5%) = $1.05 ÷ $35
(Required rate of return - 5%) = 3%
So, the required rate of return would be
= 3% + 5%
= 8%
8. a. Computer stocks currently provide an expected rate of return of 16%.
MBI, a large computer company, will pay a year-end dividend of $2 per share.
If the stock is selling at $50 per share, what must be the market's expectation
of the growth rate of MBI dividends?
b. If dividend growth forecasts for MBI are revised downward to 5% per year,
what will happen to the price of the MBI stock? What (qualitatively) will
happen to the company's price–earnings ratio?
a)
$50 = $2 / (16% - g)
16% - g = $2 / $50 = 4%
g = 16% - 4% = 12%
expected growth rate = 12%
b)
P₀ = $2 / (16% - 5%)
P₀ = $2 / 11%
P₀ = $18.18
P/E ratio = share price / EPS
since the share price decreases from $50 to $18.18, the P/E ratio will
decrease. When you are dividing a number, if the numerator decreases while
the denominator remains still, the answer will decrease.
9. a. MF Corp. has an ROE of 16% and a plowback ratio of 50%. If the coming
year's earnings are expected to be $2 per share, at what price will the stock
sell? The market capitalization rate is 12%. (Do not round intermediate
calculations.)
b. What price do you expect MF shares to sell for in 3 years?
Return on equity(r) = 0.16
Plowback ratio(b) = 50 = 0.5
Earnings per share(EPS) = $2
D1 = 50% x $2 = $1
Cost of equity(Ke) = 0.12
Growth rate(g) = b x r
= 0.5 x 0.16
= 0.08 = 8%
Current market price(Po) = D1/Po + g
= $1/0.12 - 0.08
= $25
Market price in 3 years = Po(1+g)n
= $25(1+0.08)3
= $25(1.08)3
= $31.49
Explanation:
In this case, we need to calculate growth rate by multiplying the
plowback ratio by return on equity. Then, we will calculate the current
market price as shown above. Thereafter, we will subject the current
market price to a 3-year growth rate to calculate the market price in 3
year's time
10. The market consensus is that Analog Electronic
Corporation has an ROE = 9% and a beta of 1.25. It
plans to maintain indefinitely its traditional plow-back
ratio of 2/3. This year's earnings were $3 per share.
The annual dividend was just paid. The consensus
estimate of the coming year's market return is 14%
and T-bills currently offer a 6% return.a) Find the price at
which Analog stock should sell?
b) Calculate the P/E ratio.
c) Calculate the present value of growth opportunities.
d) Suppose your research convinces you that Analog will announce
momentarily that it will immediately reduce its plow-back ratio to 1/3, then find
the intrinsic value of the stock.
a. Ke = Rf + β(Rm – Rf)
Ke = 6 + 1.25(14-6)
Ke = 6 + 10
Ke = 16%
b = 2/3
Do = 1/3 x $3 = $1
g=bx r
g = 2/3 x 9
g = 6%
Po = Do(1+g)/ke - g
Po = $1(1+0.06)/0.16-0.06
Po = $10.60
b. P/E ratio = Market price per share/Earnings per share
P/E ratio = $10.60/$3
P/R ratio = 3.53
c. Present value of growth opportunities = Market price - Value without growth
Present value of growth opportunities = $10.60 - $6.25
Present value of growth opportunities = $4.35
Value without growth = Do/Ke
= $1/0.16
= $6.25
d. b = 1/3
Do = 2/3 x $3 = $2
g = 1/3 x 9
g = 3%
Intrinsic value = Do(1+g)/Ke-g
= 2(1+0.03)/0.16-0.03
= $15.85
Explanation:
In this scenario, we need to determine cost of equity based on capital
asset pricing model. Then, we will calculate the growth rate by
multiplying the plow-back ratio by return on equity. Thereafter, the price
of the stock will be computed based on dividend growth model as
shown above. P/E ratio is the ratio of market price per share to earnings
per share.
The present value of growth opportunities is the difference between
market price and the value without growth as calculated above.
