Questions for Study Guide- Fall 2020

1) 2) 3) JJ's Manufacturing's stock sells for $34 a share. The stock just paid a dividend of $1.00 a share (i.e., D0 = $1.00), and the dividend is expected to grow forever at a constant rate of 9% a year. What stock price is expected 1 year from now? Do not round intermediate calculations. Round your answer to the nearest cent. $ a) What is the estimated required rate of return on 11's stock? Do not round intermediate calculations. Round the answer to two decimal places. (Assume the market is in equilibrium with the required return equal to the expected return.) $ Oscar's company pays a dividend of $2.75 a share (i.e., D0 = $2.75). The dividend is expected to grow 4% a year for the next 3 years and then 12% a year thereaer. What is the expected dividend per share for each of the next 5 years? Do not round intermediate calculations. Round your answers to the nearest cent. D1=$ D2=$ D3=$ D4=$ D5=$ You are analyzing Jillian's Jewelry (JJ) stock for a possible purchase. JJ just paid a dividend of $1.50 yesterday. You expect the dividend to grow at the rate of 4% per year for the next 3 years; if you buy the stock, you plan to hold it for 3 years and then sell it. a. What dividends do you expect for JJ stock over the next 3 years? In other words, calculate D1, D2 and D3. Note that D0 = $1.50. Do not round intermediate calculations. Round your answers to the nearest cent. b. J] stock has a required return of 13%, and so this is the rate you'll use to discount dividends. Find the present value of the dividend stream; that is, calculate the PV of D1, D2, and D3, and then sum these PVs. Do not round intermediate calculations. Round your answer to the nearest cent. :5 c. J] stock should trade for $19.50 3 years from now (i.e., you (11% $19.50). Discounted at a 13% rate, what is the present value of this expected future stock price? In other words, calculate the PV of $19.50. Do not round intermediate calculations. Round your answer to the nearest cent. $ d. If you plan to buy the stock, hold it for 3 years, and then sell it for $19.50, what is the most you should pay for it? Do not round intermediate calculations. Round your answer to the nearest cent. 3 e. Use the constant growth model to calculate the present value of this stock. Assume that g, = 4%, and it is constant. Do not round intermediate calculations. Round your answer to the nearest cent. 5 f. Is the value of this stock dependent on how long you plan to hold it? In other words, if your planned holding period were 2 years or 5 years rather than 3 years, would this affect the value of the stock today,__2 Explain your answer. Question 4 Investors requke a 17% rate of return on Brooks Sisters' stock (r, a 17%). a. who: amid the estimated value of Brooks' stock be Iftl'ie previous dividend was Do . soon and it Investors expect dividends to grow at a oonsrant annual rate or (1} - 2s. (2) use. (3] 6%, or {4} 10%? no not round intermediate oaiorlauons. Round your answers to the nearest oent. 1-$ 2-$ 3.3 4-$ b. Using data from Part a, what is the constant growth model's estimated value for Brooks Sisters' stool-z if the required rate of return is 17% and the expected growth rate is [1] 1m or (2} 21%? rue thee reasonable mults? Round your answers to the nearer cent. Use a minus sign to enter negative rains, ii any. If your answer Is zero, enter '0'. p. 1. Pill$ ~Selectv a 2. Po: s -Se|ect a c. is it reasonnahie to expert that a constant grown-i stock would have or a r.? -Se|mv 4) Investors require a 17% rate of return on Brooks Sisters' stock (r3 = 17%). a. What would the estimated value of Brooks' stock be if the previous dividend was Do = $4.00 and if investors expect dividends to grow at a constant annual rate of (1) - 2%, (2) 0%, (3) 6%, or (4) 10%? Do not round intermediate calculations. Round your answers to the nearest cent. ski-"Pl" 9959mm b. Using data from Part a, what is the constant growth model's estimated value for Brooks Sisters' stock if the required rate of return is 17% and the expected growth rate is (l) 17% or (2) 21%? Are these reasonable results? Round your answers to the nearest cent. Use a minus sign to enter negative values, if any. If your answer is zero, enter "0". 1. : 3 Yes, it is a reasonable result. No, it is not a reasonable result, because in this case the value of stock is undened. No, it is not a reasonable result, because in this case the value of stock is negative, which is nonsense. 2. : 3 Yes, it is a reasonable result. No, it is not a reasonable result, because in this case the value of stock is undened. No, it is not a reasonable result, because in this case the value of stock is negative, which is nonsense. c. Is it reasonable to expect that a constant growth stock would have gL? rs? I. Yes. The value of the stock is dependent upon the holding period. The value calculated in Parts a through d is the value for a 3-year holding period. It is not equal to the value calculated in Part c. Any other holding period would produce a different value L II. Yes. The value of the stock is dependent upon the holding period due to the fact that the value is determined as the present value of all future expected dividends. III. No. The value of the stock is not dependent upon the holding period unless the growth rate remains constant for the foreseeable future. IV. No. The value of the stock is not dependent upon the holding period. The value calculated in Parts a through d is the value for a 3-year holding period. It is equal to the value calculated in Part e. Any other holding period would produce the same value g V. Yes. The value of the stock is dependent upon the holding period as long as the growth rate remains constant for the foreseeable future. 3i SimpEEs Corporation does not pay any aiwdends Because it is expanding rapidly and needs to retain all of its earnings. However, investors expect Simpkins to begin paying dividends, with the rst dividend of $1.50 coming 3 years from today. The dividend should grow rapidly - at a rate of 60% per year - during Years 4 and 5. After Year 5, the company should grow at a constant rate of 4% per year. If the required return on the stock is 13%, what is the value of the stock today (assume the market is in equilibrium with the required return equal to the expected return)? Do not round intermediate calculations. Round your answer to the nearest cent. 6) Dozier Corporation is a fast-growing supplier of ofce products. Analysts project the following free cash ows (F CFs) during the next 3 years, after which FCF is expected to grow at a constant 8% rate. Dozier's weighted average cost of capital is WACC = 16%. Year 1 2 3 Free cash ow ($ millions) -$20 $30 $40 a. What is Dozier's horizon value? (Hint: Find the value of all free cash ows beyond Year 3 discounted back to Year 3.) Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answer to two decimal places. $ million b. What is the current value of operations for Dozier? Do not round intermediate calculations. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answer to two decimal places. $ million c. Suppose Dozier has $10 million in marketable securities, $100 million in debt, and 10 million shares of stock. What is the intrinsic price per share? Do not round intermediate calculations. Round your answer to the nearest cent. 7) Kendra Enterprises has never paid a dividend. Free cash ow is projected to be $80,000 and $100,000 for the next 2 years, respectively; after the second year, FCF is expected to grow at a constant rate of 9%. The company's weighted average cost of capital is 18%. a. What is the terminal, or horizon, value of operations? (Hint: Find the value of all free cash ows beyond Year 2 discounted back to Year 2.) Round your answer to the nearest cent. $ b. Calculate the value of Kendra's operations. Do not round intermediate calculations. Round your answer to the nearest cent