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Finance Valuation: Stock Value, Discount Rate, Required Return

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1. Doctors-On-Call, a newly formed medical group, just paid a dividend of $1.50. The company's dividend is expected to grow at a 20% rate for the next 3 years and at a 3% rate thereafter. What is the value of the stock if the appropriate discount rate is 12%?

2. Bill Bailey and Sons pays no dividend at the present time. The company plans to start paying an annual dividend in the amount of $.30 a share for two years commencing two years from today. After that time, the company plans on paying a constant $1 a share dividend indefinitely. How much are you willing to pay to buy a share of this stock if your required return is 14%?

3. Schnusenberg Corporation just paid a dividend of $0.65 per share, and that dividend is expected to grow at a constant rate of 7.00% per year in the future. The company's beta is 0.95, the required return on the market is 10.50%, and the risk-free rate is 5.00%. What is the company's current stock price?

4. A company forecasts the free cash flows (in millions) shown below. The weighted average cost of capital is 13%, and the FCFs are expected to continue growing at a 5% rate after Year 3. Assuming that the ROIC is expected to remain constant in Year 3 and beyond, what is the Year 0 value of operations, in millions?

Year: 1 2 3
Free cash flow: -$15 $10 $40

5. Zhdanov Inc. forecasts that its free cash flow in the coming year, i.e., at t = 1, will be -$10 million, but its FCF at t = 2 will be $20 million. After Year 2, FCF is expected to grow at a constant rate of 4% forever.

Its balance sheet shows

- $65 million in accounts receivable,
- $45 million in inventory,
- $43 million in short-term investments that are unrelated to operations,
- $20 million in accounts payable,
- $95 million in long-term debt,
- $25 million in preferred stock,
- $40 million in retained earnings, and $
- 130 million in total common equity.

If the weighted average cost of capital is 14%, what is the firm's value of operations, in millions?

If the company has 30 million shares of stock outstanding, what is the best estimate of the stock's price per share?

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Solution Summary

The following posting helps with finance valuation problems. Concepts covered include stock value, discount rate and required return.

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