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# Corporate Finance: Value of the Stock

See the attached file.

7.11- Assume that the average firm in your company's industry is expected to grow at a constant rate of 6% and its dividend yield is 7%. Your company is about as risky as the average firm in the industry, but it has just successfully completed some R&D work which leads you to expect that its earnings and dividends will grow at a rate of 50% {D1=D0(1+g)=D0(1.5)}this year and 25% the following year, after which growth rate should match the 6% industry average rate. The last dividend paid D0 was \$1. What is the value per share of your company's stock?

7.12 -Simpkins Corporation is expanding rapidly, and it does not pay and dividends because it currently needs to retain all of its earnings. However, investors expect Simpkins to begin paying dividends, with the first dividend of \$1.00 coming 3 years from today. The dividend should grow rapidly-at a rate of 50% per- during Years 4 and 5. After Year 5, the company should grow at a constant rate of 8% per year. If the required return on the stock is 15% what is the value of the stock today?

7.17- Suppose a firm's common stock paid a dividend of \$2 yesterday. You expect the dividend to grow at the rate of 5% per year for the next 3 years; if you buy the stock, you plan to hold it for 3 years and sell it.
a. Find the expected dividend for each of the next 3 years, in otherwords, calculate d1, d2, d3. Note that d0=\$2. b. given the appropriate discount rate is 12% and that the first of these dividend payments will occur 1 year from now, find the present value of the dividend stream: that is, calculate the PV of d1,d2,d3 & sum these PVS. c. You expect to the price of the stock 3 years from now to be \$34.73. (Phat 3=34.73.) Discounted at 12% rate, what is the present value of this expected future stock price? (Calculate the PV of 34.73) d. If you plan to buy the stock, hold it for three years, and then sell it for 34.73, what is the most you will pay for it? e. Use the constant growth equation to calculate the present value of the stock. Assume that g=5% and is constant. f. Is the value of this stock dependent on how you plan to hold it? In other words, if your planned holding period were 2 yrs or 5yrs rather than 3 years, would this affect the value of the stock today (Phat0). Explain your answer

9.7-Shi Importers' balance sheet shows \$300 million in debt, \$50 million in preferred stock, and \$250 million in total common equity. Shi faces a 40% tax rate and the following data: rd = 6%, rps = 5.8% and rs = 12%. If Shi has a target capital structure of 30% debt, 5% preferred stock, and 65% common stock, what is Shi's WACC?

9.8-David Ortiz Motors have a target capital structure of 40% debt and 60% equity. The yield to maturity on the company's outstanding bonds is 9%, and the company's tax rate is 40%. Ortiz's CFO has calculated the company's WACC as 9.96%. What is the company's cost of equity capital?

9.9-A company's 6% coupon rate, semi annual payment, \$1,000 par value bond that matures in 30 years sells at a price of \$515.16. The company's federal plus state tax rate is 40%. What is the firms component cost of debt for purposes of calculating the WACC? (Hint: Base your answer on the nominal rate)

9.10-The earnings, dividends, and stock price of Shelby Inc. are expected to grow at 7% per year in the future. Shelby's common stock sells for \$23 per share, its last dividend was \$2.00, and the company will pay a dividend of \$2.14 at the end of the current year.
a. Using discounted cash flow approach, what is the cost of equity?
b. If the firm's beta is 1.6, the risk free rate is 9% and the expected return on the market is 13%, what will be the firm's cost of equity using the CAPM approach?
c. If the firm's bonds earn a rate of return of 12%, what will rs be using the bond-yield-plus-risk-premium approach? Use the midpoint of the risk premium range.
d. On the basis of the results of parts a through c, what would you estimate Shelby's cost of equity to be?

#### Solution Summary

The solution discusses determines the value of the stock for the company.

\$2.19