Please answer all following short questions for Upvote. 1. a) Calculate the pric

Question

Please answer all following short questions for Upvote.

1. a) Calculate the price to sales ratio when the payout ratio is 35% and net profit margin is 2.5% with a growth rate of 3%and required return on the part of investors is 10%.

b) If sales rise by $0.65 per share, what would be the change in stock price?

2. a) Calculate price to book value if the payout ratio is 30%, ROE is 25% growth in earnings is 4% and the required return is 9%.

b) If the book value rises by $2, what would be the corresponding change in stock price?

3) Calculate the fair value based on the following information:

       Current dividend = $1.50

      Normal growth rate = 4%

      Super growth rate = 18%

      Duration of the super growth rate = 10 years

      Required return 11%    

4. Use the “FED Model” for calculating the price with the following.

EPS of $6.50; bond yield of 3.5% (AA quality); growth in earnings of 3%.

Explanation / Answer

1) Price = D1 / ( Ke - g )

Dividing bothe the sides by Sales per Share

Price / Sales = (Profit Margin * Payout ratio * (1+g) ) / ( Ke - G )

= (2.5% * 35% * (1 + 3 %) ) / (10%-3%) = 0.1288

b) If sales increase by $ 0.65 price of the stock would increase by = 0.65 * 0.1288 = $ 0.0837

2) Price / Book Value = ( ROE - g ) / (Ke - g ) = ( 25% - 4% ) / ( 9% - 4% ) = 4.2

If book value incease by $2 , price of the stock would increase by , 4.2 * $ 2 = $ 8.4

3)

D11 = 8.16

P10 =

D11 / (Ke - g)

PVIF @ 11%

Fair Value =

$ 57.55

4. FED Model =

E1/ P = Bond Yield

6.50 (1.03) / 3.5%=P

D0 = 1.5 D1 = 1.77 D2 = 2.09 D3 = 2.46 D4 = 2.91 D5 = 3.43 D6 = 4.05 D7 = 4.78 D8 = 5.64 D9 = 6.65 D10= 7.85

D11 = 8.16

P10 =

D11 / (Ke - g)

8.16/ ( 11% - 4% ) 116.5714

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