iss and its 29,suencorp expects to earn $ 6 per share next year firm\'s market t
ID: 2806735 • Letter: I
Question
iss and its 29,suencorp expects to earn $ 6 per share next year firm's market themsee rate is 10%, what is the present value of its Voed A) $ 120 8) $ 160 $ 180 )$ 200 Eagle Products' EBIT is$400, lts tax fate is 35%, depreciation is $2acapital expenditures are $60, and the 20 in net working capital is $ 30. What is the free cash ow to the firm? A) 190 8) 180 170 D) 150 21. A common stock pays an stock is 4% the annual dividend is expected to remanesa,hat ste annual dividend per share of S 310 The risk-ree rate is 7% and the risk premin orthe stock? A) 15.20 8) 8.01 C 18.10 D) 28.38 22. The risk-free rate of retum is 5%, the required fate of retum on the market is 2ON, and High-mer stock coefficient of 15. ifthhe dividend per share epected dring conre year, D. issaso 1.4%, at wha- should a share sell? A) $20.20 8) $35.31 C) $41.38 D) $52.20 The following 2 questions refer to the same company 23. Computer stocks currently provide an expected iate of return of 16%. MB, a large computer company, year-end dividend of $ 2 per share ofthe stock seingatssoper share, what mat be the market's epee growth of M8I dividends? A) 10% B)12% C) 14% D) 16% 24. If dividend growth forecasts for MBI are revised do-adto5%per year, what wa happen to the pr stock? A) Stock goes up to $ 55.20 B) Stock goes up to $ 51.10 C) Stock goes down to $ 25.01 D) Stock goes down to $ 18.18Explanation / Answer
Answer 19.
EPS1 = $6
ROE = 15%
Plowback ratio = 60%
Capitalization rate, k = 10%
Growth rate, g = ROE * plowback Ratio
Growth rate, g = 15% * 60%
Growth rate, g = 9%
D1 = EPS1 * (1 - Plowback Ratio)
D1 = $6 * (1 - 0.60)
D1 = $2.40
P0 = D1 / (k - g)
P0 = $2.40 / (0.10 - 0.09)
P0 = $240
PVGO = P0 - EPS1 / k
PVGO = $240 - $6 / 0.10
PVGO = $240 - $60
PVGO = $180
Answer 20.
Free Cash Flow = EBIT*(1-tax) +Depreciation - Capital Expenditure - Change in NWC
Free Cash Flow = $400*(1-0.35) + $20 - $60 - $30
Free Cash Flow = $260 - $70
Free Cash Flow = $190
Answer 21.
Required Rate of Return = Risk-free Rate + Risk Premium
Required Rate of Return = 7% + 4%
Required Rate of Return = 11%
Current Price = Constant Dividend / Required Rate of Return
Current Price = $3.10 / 0.11
Current Price = $28.18
Answer 22.
Required Rate of Return, r = Risk-free Rate + beta * (Market return - risk-free rate)
Required Rate of Return, r = 5% + 1.5 * (10% - 5%)
Required Rate of Return, r = 12.5%
Current Price = D1 / (r - g)
Current Price = $3.50 / (0.125 - 0.04)
Current Price = $41.18
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