1. Company A just paid a dividend of $2.00. The risk-free rate of return is 1% a

Question

1. Company A just paid a dividend of $2.00. The risk-free rate of return is 1% and the market risk premium is 12%. The beta of the company's stock is 1.20. If you know the company's dividend is growing at a constant rate of 3%, What is the intrinsic value of the company 5 years from today?

2. Goog company has an EBIT*(1-tax) of $9,737, a depreciation of $1,851, change of NWC of $381, and a capital expenditure of $3,438. The growth rate of free cash flow is expected to be 17.68% for next two years. The beta of the firm is 1.19, the target capital structure of the firm is 6% debt 94% equity, the cost of debt is 3%, the tax rate is 40%, the market risk premium is 8% and the risk free rate is 1%. Given a comparable Price to Ebitda ratio of 14.15 and a market value of debt of $4,200, what is firm’s equity value using the FCFF approach?

A.

$138,792

B.

$214,190

C.

$102,120

D.

$360,012

A.

$138,792

B.

$214,190

C.

$102,120

D.

$360,012

Explanation / Answer

1. Intrinsic value of company 5 years from today is $ 19.27

Just paid dividend (D0) = 2 Growth in dividend (g) = 3% Dividend in 5 years today (D5) = 2*{(1.03)^5} = 2.32 Value of company's share 5 years from Now = D5*(1+g)/(Ke-g) = 2.32*(1+.03)/(.154-.03) = 2.39/.124 = $ 19.27

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