Describe valuation of shares by discounting cash flows

Reference no: EM1314320

Describe Valuation of shares by discounting cash flows technique

1. Holmgren Hotels' stock has a required return of 11%. The stock currently does not pay a dividend but it expects to begin paying a dividend of $1.00 per share starting five years from today ($1.00). Once established the dividend is expected to grow by 25% per year for two years, after which time it is expected to grow at a constant rate of 10% per year. What should be Holmgren's stock price today?

$ 84.80
$ 174.34
$ 76.60
$ 94.13
$ 77.27

2. The Hart Mountain Company is expected to experience an unusually high growth rate (20%) during the next 3 years. However, in the fourth year the firm is expected to begin growing at a constant long-term growth rate of 8%. During the rapid growth period, the firm's dividend payout ratio will be relatively low (20%) in order to conserve funds for reinvestment. However, the decrease in growth in the fourth year will also be accompanied by an increase in the dividend payout to 50%. Last year's earnings were E0 = $2.00 per share, and the firm's required return is 10%. What should be the current price of the common stock?

$66.50
$87.96
$71.54
$61.78
$93.50

3. Club Auto Parts' last dividend, D0, was $0.50, and the company expects to experience no growth for the next 2 years. However, Club will grow at an annual rate of 5% in the third and fourth years, and, beginning with the fifth year, it should attain a 10% growth rate that it will sustain thereafter. Club has a required rate of return of 12%. What should be the price per share of Club stock at the end of the second year, ?

$19.98
$25.08
$31.21
$19.48
$27.55

4. Modular Systems In just paid dividend D0, and it is expecting both earnings and dividends to grow by 0% in Year 2, by 5% in Year 3, and at a rate of 10% in Year 4 and thereafter. The required return on Modular is 15%, and it sells at its equilibrium price, P0 = $49.87. What is the expected value of the next dividend, D1?

It cannot be estimated without more data
$1.35
$1.85
$2.35
$2.85

5. Heino In hired you as a consultant to help them estimate their cost of capital. You have been provided with the following data: rRF = 5.0%; RPM = 5.0%; and b = 1.1. Based on the CAPM approach, what is the cost of equity from retained earnings?

10.50%
10.71%
10.88%
11.03%
11.14%

6. Rhino In hired you as a consultant to help them estimate their cost of capital. You have been provided with the following data: D1 = $1.30; P0 = $40.00; and g = 7% (constant). Based on the DCF approach, what is the cost of equity from retained earnings?

9.66%
9.84%
9.97%
10.08%
10.25%

7. You were hired as a consultant to Locke Company, and you were provided with the following data: Target capital structure: 40% debt, 10% preferred, and 50% common equity. The interest rate on new debt is 7.5%, the yield on the preferred is 7.0%, the cost of retained earnings is 11.50%, and the tax rate is 40%. The firm will not be issuing any new stock. What is the firm's WACC?

8.25%
8.38%
8.49%
8.61%
8.76%

8. Reingaart Systems is expected to pay a $3.00 dividend at year end (D1 = $3.00), the dividend is expected to grow at a constant rate of 7% a year, and the common stock currently sells for $60 a shar The before-tax cost of debt is 8%, and the tax rate is 40%. The target capital structure consists of 60% debt and 40% common equity. What is the company's WACC if all equity is from retained earnings?

7.17%
7.31%
7.45%
7.68%
7.84%

9. The common stock of Anthony Steel has a beta of 1.20. The risk-free rate is 5% and the market risk premium is 6%. Assume the firm will be able to use retained earnings to fund the equity portion of its capital budget. What is the company's cost of retained earnings, rs?

7.0%
7.2%
11.0%
12.2%
12.4%

10. Sun State Mining In, an all-equity firm, is considering forming a new division that will increase the firm's assets by 50%. Sun State currently has a required return of 18%, U.S. Treasury bonds yield 7%, and the market risk premium is 5%. If Sun State wants to reduce its required return to 16%, what is the maximum beta coefficient the new division could have?

Reference no: EM1314320

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