Topic G Exercises

Chapter $18$ Equity Valuation Models

Exercise Problem #$1$

The market consensus is that SuperSmart Corporation has ROE $=15\%$ and a beta of $1\mathrm{.}2,$ and an expected earnings per share $($E$1)$ of $$3\mathrm{.}6.$ The market believes that Super Smart Corporation plans to maintain indefinitely its retention ratio $($b$)$ of $70\%.$ The expected market return for the coming years is $11\%,$ and risk free assets $(10-$year Treasury notes$)$ are yielding $3\%.$

$($a$)$ Find the intrinsic value estimate of SuperSmart stock according to the constant growth DDM$.$

$($b$)$ Calculate the present value of growth opportunities.

Exercise Problem #$2$

George Johnson is preparing a valuation of Logistic Solutions, Inc. George has decided to use a two$-$stage DDM model and the following estimates. The Dividend per share is $$2\mathrm{.}60$ for the current year $(D_0)$ and expected to grow at $15\%$ annually for the first five years, and $8\%$ afterwards, indefinitely. Logistic Solutions' estimated beta is $1\mathrm{.}5,$ and George believes that the current market conditions dictate a $3\mathrm{.}0\%$ risk free rate of return and a $7\mathrm{.}0\%$ market risk premium. According to the two$-$stage DDM model, the stock of Logistic Solutions should be worth today.

Exercise Problem #$3$

Exercise Bicycle Company is expected to pay a dividend of $$3\mathrm{.}60$ in year $1,$ a dividend of $$4\mathrm{.}30$ in year $2,$ and a dividend of $$4\mathrm{.}80$ in year $3.$ After year $3,$ dividends are expected to grow at the rate of $9\%$ per year. An appropriate required return for the stock is $15\%.$ The stock should be worth $q,$ today.