A stock currently pays no dividend. It plans to start paying a dividend in year
ID: 2716358 • Letter: A
Question
A stock currently pays no dividend. It plans to start paying a dividend in year 3. The first dividend
will be $10 and dividends are expected to grow at 3% each year thereafter. If the stock has an equity
beta of 1.2, what is the current stock price to the nearest cent? Assume a risk-free rate of 3% and a
Market Risk Premium of 5%.
a) $166.67
b) $152.91
c) $140.28
d) $128.70
e) There is not sufficient information to answer this question.
A firm has EBITDA of $20 million and pays taxes at the rate of 35%. It spends $15 million on
capital expenditure, $0.5 million on new investment in net working capital, and has depreciation of
$11 million. It pays $7 million in debt interest and plans on paying a total dividend of $1 million.
What is the free cash flow (to 2 decimal places)?
a) $3.50 million
b) $4.50 million
c) $1.35 million
d) -$1.65 million
e) -$9.65 million
A stock currently pays no dividend. It plans to start paying a dividend in year 3. The first dividend
will be $10 and dividends are expected to grow at 3% each year thereafter. If the stock has an equity
beta of 1.2, what is the current stock price to the nearest cent? Assume a risk-free rate of 3% and a
Market Risk Premium of 5%.
a) $166.67
b) $152.91
c) $140.28
d) $128.70
e) There is not sufficient information to answer this question.
A firm has EBITDA of $20 million and pays taxes at the rate of 35%. It spends $15 million on
capital expenditure, $0.5 million on new investment in net working capital, and has depreciation of
$11 million. It pays $7 million in debt interest and plans on paying a total dividend of $1 million.
What is the free cash flow (to 2 decimal places)?
a) $3.50 million
b) $4.50 million
c) $1.35 million
d) -$1.65 million
e) -$9.65 million
Explanation / Answer
1)
expected return = risk-free rate + beta * (market risk premium)
= 3 + 1.2 *5 =9%
Where
2) FCFF = EBIDTA * ( 1 - tax rate) = depreciation *tax rate - working capital - capital expenditure
= 20* ( 1 - .35) + 11*.35 - 0.5 - 15 = 1.35m
Year Previous year dividend Dividend growth rate Dividend current year Terminal value Total Value Discount factor Discounted value 1 - 0% 0 0 1.09 0 2 0 0% 0 0 1.1881 0 3 0 0% 10 171.6666667 181.6666667 1.295029 140.2799989 4 10 3% 10.3 Value of stock = Sum of discounted value= 140.2799989Related Questions
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