A. If D = $1.75, g (which is constant) = 3.6%, and P = $31.00, what is the stock

Question

A. If D = $1.75, g (which is constant) = 3.6%, and P = $31.00, what is the stock’s expected total return for the coming year?

B. You must estimate the intrinsic value of Noe Technologies’ stock. The end-of-year free cash flow (FCF) is expected to be $24.00 million, and it is expected to grow at a constant rate of 7.0% a year thereafter. The company’s WACC is 10.0%, it has $125.0 million of long-term debt plus preferred stock outstanding, and there are 15.0 million shares of common stock outstanding. What is the firm's estimated intrinsic value per share of common stock?

C. Wall Inc. forecasts that it will have the free cash flows (in millions) shown below. If the weighted average cost of capital is 14% and the free cash flows are expected to continue growing at the same rate after Year 3 as from Year 2 to Year 3, what is the firm’s total corporate value, in millions?

C. Sorenson Corp.’s expected year-end dividend is D = $4.00, its required return is r = 11.00%, its dividend yield is 6.00%, and its growth rate is expected to be constant in the future. What is Sorenson's expected stock price in 7 years, i.e., what is 7

Explanation / Answer

A.

Stock's expected total return = D / P + g = $1.75 / $31.00 + 3.6% = 9.25%

B.

End of Year FCF = $24.00 million

Constant Growth Rate = 7%

WACC = 10%

Intrinsic value of the Firm = 24 * 1.07 / (0.10 - 0.07) = $856 million

Interinsic Value of the Stock = Value of Firm - Long-term debt - Outstanding Preferred Stock = $856 million - $125 million = $731 million

Interinsic Value each stock of Noe Tech = $731 million / 15 million = $48.73

C.

Wall Inc. Free Cash flows details are missing.

D.

Year End Expected Dividend (D) = $4.00

Required return = 11.00%

Dividend yield = 6%

Current Stock price = Dividend / Dividend yield = $4.00 / 0.06 = $66.67

Growth = Required Return - D / P = 0.11 - $4 / $66.67 = 5.00%

Stock price in year 7 = Dividend at end of year 7 * (1 + Growth) / (Required Return - Constant Growth)

Or, Stock price in year 7 = $4.00 * (1.05)^7 * 1.05 / (0.11 - 0.05) = $98.50

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