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# Beta coefficient

,.ylHenrico'
stock is currently selling tor(:d ashare. Tlre stock is expected to pay
1
eitividenU
at the end of the year. The stock'i-il-ividend is expeaed to grow at a constan-t rate
pf
7
percent a year forever. The risk-free rate (f,*) (S percent
and the market risk premium (kM-
-
kse) is alsq 6frcent. What is the stock'-s Oetal
L
-"3
= a. .a',; ,
r -
o,o)
40(
_
.l.k
__
r
rtor
- q.?
Expected Return
2. Given a beta of 1.25, Risk Free Rate of 7.5o/o, and market risk premium expected on the
stocks is 6Yo, What is the expected rate of return of stock of Henrika Company?
I
I
r:Yr+
f('rt<?\
'1.<
rC2'',,?,.{7'
:7r,r,"
I ilO(C't.\
=
l5'1"
Stock growth rate
lL=
r--
b"\
!
a
-v
a(o)
l
3. Pearla Corporation's stock is selling for{_40 in the market. The company's beta ip OlD, the
market risk premium is 5 percent, and the risk-free rate i5 9 percent. The previouldpid"nd
wasiP2 and dividendstare expected to grow at a constant r/te. What is the stock's grourth
\__-_
rate? ,
\.
Stock growth rate
s.sz-'fos
=
Lt,t_3
4. Bubble conporation's Financial Information stated the following:
Price-Earnings Ratio (PER)- 5:1 =
:
Dividend per Share of P 4
Net lncome - P500,000
Outstanding common stocks - 100000
Average Equity - P2,000,000
\t4
.,J
.t,
t
: t-9L
\L
g a
t.bB/.
I
Find the sustainable growth rate? Find the expected rate of return'l
\,1
F
-.oS
Capitalgains yield and dividend yield
l.rt I1{ .o-r\
5r:>5
=
)Y -- 3.GS\q,
.D
aSr-1'L{:1
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' s.L<
(-
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--
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L<
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I
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1
LaMadrid Corporation has a stock price of P32.35
ylr
share. The last.dividend was P3.42.
The long-run groMh rate for the LaMadrid corpodion is a constartt 7
fercent.
What is the
company's capitalgains yielcl and dividend yield?
\
-
r-.oJ
3't.br-
L.!-c.qS = b.\L
y o'?.5crl
!7.3{
<--
I
<-b\ :
)',1
,
31.aSr : S.Q239
Stock price
and P/E ratio
6. During the past few years,
Jamila Company has retained, on the average, 70 percent of its
earnings in the business. The future retention rate is expected to remain at 70 percent of
earnings, and long-run earnings groMh
is expected to be 1O percent. lf the risk-free rate,
kp6, is 8 percent, the expected return on the market, ky, is 12 percent,
Swanson's beta is 2,0,
and the most recent dividend, De, wos P1.50, what is the most likely market price and P/E
ratio (Ps/E1)
for Jamila's stock today?
HP
=
2t.S
P/t t*ti"
:
s: I
Stock price
7
'
You have been given the following projections for Apol Corporation for the coming year.
o
Sales
=
10,000 units.
a
a
a
a
a
a
Sales price per unit
=
P10.
Variable cost per unit
=
P5.
Fixed costs
=
P10,000.
Bonds outstanding
=
P15,000.
Q
on outstanding bonds
=
8%.
Tax rate
=
4O%o.
f 2 s/. +
l.q
(a,as't.)
( r
lo.a'1.
D'r,
'-
l.51ceg
o.loc -o.ol
PS:
2t? -
L....,a
lc,.cDo
po9
: co'|.
l.slcog
z-57.t
\$=
o
Shares of common stock outstanding
=
10,000 shares.
.
Beta
=
1.4.
,
Growth rate
=
8%, Dividend Payout Ratio : 60%
'
knr
=
5%.
.
ku=9%.
Glculate the current price per share for Apol Corporation. s6.?2-
Preferred stock value
8. ED-Bug Corporation is growing at a constant rate of 6 percent per year. lt has both common
stock and norr-participating preferred stock outstanding. The cost of preferred stock (kr) is 8
percent. The par value of the preferred stock is P12O and the stock has a stated dividend of
L0 percent of par,
What is the market value of the preferred stock?
o.q
1zo(o't')
Constant grorth
9. MakDo Com k is rtqp per share. The stock's dividend is
projected to a co ercent per year. The required rate of return
on the stock, cent expected price ofthe stock 4 yearsfrom today?
?o- LS
i'l
q
=
17.
P{
=
es (r
''r)'
constantgrowthstock
".1 ,".,.
.
-
ll
rare is
"*p"ffid
to pay a year-end dividend o
)
)w at a constant rate over time. The stock h
nd the market risk premium is
{qgfent.
What
is the stock's expected price seven years from today?
r=
9/.
* ,.,
("7.)
= \t-/,
10 ,J_
.tl
-x
/-
=
o.o(e
P?
=
.{o
(,.*)l
= ia;;-
t)
, r,Y rytvtALIW.4nYALtI:Mt:-N
I ll l.fugpgao,fi.fiilanalo
Decllninggrmrth stock
11. The Fortune Company has been hit hard due to increased competition, The company's
analysts predict that earnings (and dividends) will decline at a rate of 5 percent annually
forever. Assume that k,
=
11 percent and Do
=
P2.00. What will be the price of the
company's stock three years
from now?
Nonconstant growth stock
12. The last dividend paid by JV Company was P1.00. JV's growth rate is expected to be a
constant 5 percent for 2 years, after which dividends are expected to grow at a rate of 10
percent forever. JV's required rate of return on equity (kr) is 12 percent, What is the
current price of JVs common stock?
b'l
3'
s7.
*zgo
(o7.
-+
caslq|
l-
G
l:-.l .
Nonconstant growth stock
Do=\ Dr.l.oS D2
:
f .ro25 D9.
l.LlLf
o.q"1g4-------J o.Qsj9
o.&'rgq
2-----I1'
tlt.W8
{
Po= so.sa7- Pr:sS.te5
13. Bob UyTe lnc. (BUTI) is presently in a stage of abnormally high groMh because of a surge in
96
= ls. l-ttg
R
. |G.lo2.u
h ,
tG.8qc-r
i, - I l. LD
Pq--
D.zr,
g r
Lo7.
4> ggry Pra
=
tz.)S7.
o
-D
cas!ryrf-
rV
=
y.-l
.
Dirro .
l.9o
b=
t.G
Nonconstant growth stock
14. ADB lndustries expects to pay a P3.00 per share dividend on its common stock at the end of
?o,
51.o5 the year. The dividend ls expected to grow 25 percent a year until t
=
3, aftqqwhich time
the dividend is expected to grow at a constant rate of 5 percent a year (Og
=
Pa.e8)5 and
C
, =
P4.921875). The stock's beta is 1.2, the risk-free rate of interest is 5 percent, and the
Pq
=
19.
market rate of return is 11 percent. What is the company's current stock price?
Div,
= ,
r= G'/., t-z
( tt ct.)
(
= l9't,
l.so
l.<
/L.tG
z.sgz a.ilo.{
t. tto'{
ts.l]lY
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b. l.z
rk.e7-
(n *
lt7. g.of
?o.
(.qtlt1l
t
.p.aLS
s a required return cent. The stock currentty Uoesh6tFEV ,
cts to begin paying of P1.00 per share starting five years from
=
\o'"o:i
today (Ds
=
P1.00). Once established the dividend is expected to grow by 25 percent per
t" =
d',f
'
r. t/.
'
Dt'l'oo
.trt
g'zs/'-r"1o
ormalgrowth stock
b7'
year
for two years, after which time it is expected to grow at a constant rate of 10 percent
per year. What should be Crispy-one's stock price today?
Ds
D6 D? Dg
(..o
t.L< l.sG l.1L
t1L
16. RiSa Company has been
growint at a 10 percent rate, and it
just paid a dividend of P3.(D.
Due to a new product, RiSa expects to achieve a dramatic increase in its short-run growth
rate, to 20 percent annually for the next 2 years. After this time, growth is expected to
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,
5
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lc>J. +2g,7
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--
c-eID
=
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FI NA N C IAL A4A IIAG E.M E. N T I I /.fiaggaq/.lfianalo
return to the long-run constant rate of 10 percent. The company's beta is 2.9 the required
return on an average stock is 11 percent, and the risk-free rate is 7 percent. What should be
the dividend yield (D/Po)today?
Divq
v
t
g
=
zo7.
-n
L&5
1t:1.
t c-
b'- 7.o
fm
= tt'/.
FCF modelfor vatuing S%ar.t''
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--
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c
.
\s.1.
-
g.a q.52
tl.-lst
V6 a
-
t-
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-'
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(.rr).
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'/t
uv
=
Ji":
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tfl, -_ t,'rz
pr
=
S7
L7. An analyst is trying to estimate the intrinsic value of the stock of SMBC. The analyst
estimates that SMBC'S free cash flow during the next year will be P25 million. The analyst
also estimates that the compan/s free cash flow will increase at a constant rate of 7
percent a year and that the company's WACC is 10 percent. SMBC has P200 million of long-
term debt and preferred stock, and 30 million outstanding shares of common stock. What
is the estimated
per-share price of SMBC common stock?
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FCF modelfor valuing stock
1,8. Today is December 31, 2010.
ct.rt9.t 1
b,ooOrglc6
21. tl
The following information applies to Addison Airlines:
a
a
a
a
a
After-tax, operating income
[EBIT(1
- T)] for the year 2011 is expected to be P400 million.
The company's depreciation expense for the year 2OLL is expected to be P80 million.
The company's capita! expenditures for the year 201L are expected to be P160 million.
No change is expected in the company's net operating working capital.
The company's free cash flow is expected to
Brow
at a constant rate of 5 percent per
year.
The company's cost of equity is 14 percent.
The company's WACC is 10 percent.
The current market value of the cornpany's debt is P1.4 billion.
The company currently has 125 nnillion shares of stock outstanding.
tJsing the free cash flow valuation method, what should be the company's stock
price
today?
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t<Er
a
a
o
a
t'\v'corYJ :
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xar)
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N NANCI,AL MA IYAG E-M E. NT II
lD"g"g"o,/.fillanalo
return to the long-run constant rate of 10 percent. The company's beta is 2.Q the required
return on an average stock is 11 percent, and the risk-free rate is 7 percent. What should be
the dividend yield (D:/po) today?
r
:
t T. + a(u -r)
Dv
-_
?.6 r-_. .
pivq.v!
?. ,t-l
e!'-
'/
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^
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zo7.
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ot=
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FCF rnodelfor valuing'555;n;i'
tFr'
-- D-'12
1-7. An analyst is trying to estimate the intrinsic value of the stock of SMBC. The analyst
P'
estimates that SMBC's free cash flow during the next year wiil be P25 million. The analyst
also estimates that the company's free cash flow will increase at constant rate of 7
percent a year and that the cornpany's WACC is 10 percent. SMBC has P200 million of long-
term debt and preferred stock, and 30 million outstanding shares sf common stock. What
is tlre estirnated per-share price of SMBC common stock?
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r4Y .*fry ts),571,t9i
45.oo96rc
=
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pS
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wc, . lo
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FCF modetfor valuing stock
2l' 11
18, Today is December 3L,2OtO. The following information applies to Addison Airlines:
Aftor-tax, operating income
[EBIT(L
- T)] for the year 2011 is expected to be P400 million.
The company's depreciation expense for the year 2011 is expected to be P80 million.
The company's capital expenditures fon the year 201L are expected to be P160 million.
No change is expected in the company's net operating working capital.
The compan'/s free cash flow is expected to grow at a constant rate of 5 percent per
year.
The company's cost of equity is 14 percerit.
The company's WACC is 10 percent.
The current market value of the company's debt is P1.4 billion.
The company currently has L25 rniilion shares of stock outstanding.
tking the free cash flow valuation method, what should be the company's stock price
today?
qo
a
o
o
o
f\v - coryJ
CrtY
-
o"ar)
j'_:tll
f,tV
-
osh
-
\$
oufr. sh
l"-;
l,qoc.troc*r6so
I
ll,a,*o,o*
D=
r0
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f,.fO k
cng,l
FI NA N C IA L MANAG E.M E. N T I I
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FCF rnodel for vatuing stock
19. An analyst has collected the following information about VolVo Electric:
r
Projected EBIT for the next year P300 million.
r
Projected depreciation expense for the next year P50 million.
o
Projected capital expenditures for the next year P100 million.
r
Projected increase in operating woi'king capital next year P60 millicn.
o
Tax rale 4Oo/o.
o
WACC 10%.
o
Cost of equity 13%.
o
Market value of debt and preferred stock today
p500
million.
o
Nunrber of shares outstanding today 20 million.
The company's free cash flow is expected to grow
at a constant rate of
5 percent a year. The analyst uses the corporate value model approach to estimate the
stock's intrinsic value. What is the stock's intrinsir value today?
\CI
f\tt
ta
crt
t
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q.
v.
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Weightcd Average Cost of Capital (WACC)
20. The ntarket value of FlNman Company's equity is P30 million, and the market value of it's
risk free debt P10 million. lf the required rpte of return on the equity is 20% and that on
debt is 8%o, calculate the FlNman's cost of .\$[ffif assume no taxes, (b) assume 35% tax.
-
ctpl,t, Le,
yr4ryrL
f
*,
tG, stxlz
vc.t... (p)
\or?(cL-
=
;osl
"P "lc.bt
(po) * Da-
t co>t
dl eI4.\ (rr)
,, enk
x
(l-
Ta^9.,8)
1o Ft + .}c[4
=
p',!.
= 15.t-,t
.lometimes
beirr-{in a (elation"hip
is like,
p;rid..,J-f,rowth
Mod.l. \tfirst,ithas
a
\$rp.t\o*al f,rowth
rate until ...ching the horizon date when
fonstant f,rowth
rate starts.
ffio.e
so, the.e are so .rll.d
fositive
and
\egative growth rate.
fhus,
(elationship
b..or.t
stronge r with
fositive
or
Incrcasing
rate
,,vhile
it might e.d *ith
\egative
or.
p".linin
g rate.
f-lo*.u.r,
li\<e
^
/ero f,rowth
rate
gou r"g .hoore to be
just
friends from the start until no
end. ."
Fl NA N C l,4L A/tA IVAG E M E N fl I lb"gg"o, A.Man"lo
Stock prlce
and P/E ratlo
6. Durlng the past few years, Janrlla Company has retained, on the average, 70 percent of its
earnlngs In the business. The lirture retention rate is expected to remain at 70 percrent of
earnlngs, and long-run earnings growth
is expected to be 10 percent. lf the rlsk-free rate,
kxp, ls 8 percent, the expected return on the market, ky, is 12 percent, Swanson's beta is 2.0,
and the most recent dividend, De, was P1.50, what is the most likely market price and P/E
ratlo (P6/E1) for Jamlla's stock today?
HP' 2-1.,5
P/t
'.ti"
r
s: I
Stock prlce
7, You have been given the followlng projections for Apol Conporation for the ccrming year.
o
Sales
=
1O000 units,
o
Sales prlce per unit
=
P10.
o
Variable cost per unlt
=
P5.
o
Fixed costs
=
P10,000.
o
Bonds outstandlng
=
P15,000.
o
fu
on outstanding bonds
=
8%.
o
Tax rate
=
40%.
Po
r, s/. +
l.q
(lf s't.)
r
t
1o.O7,
gr Dir,
'
l'3Q&g
Ps(
?tE.:::-, L.,,L7
lqcDo
PoB
. co'|, r
l.siGB
7.tlg
o
Shares of common stock outstanding
=
1O000 shares.
o
Beta
=
L,4,
,
Growth rate
=
8%, Dividend Payout Ratio : 60%
o
knr
=
5%.
o
krvr
=
9%.
Calculate the current price per share for Apol Corporation. s6.12-
Preferred stock value
8. ElBug Corporation ls,growing at a constant rate of 6 percent per year. lt has both common
stock and non-partlclpating preferred stock outstandlng. The cost of preferred stock (kp) is 8
percent.
The par value of the preferred stock ls PL}O, and the stock has a stated dividend of
10
percent
of par. What ls the rnarket value of the preferred stock?
1zo
(wl,)
o.el,
Constant growth
9. MakDo Company's stock is currently trading at P25 per share. The stock's dlvidend ls
proJected to increase at a constant rate of 7 percent per year. The requlred rate of return
on the stock, k" is 10 percent. What is the expected price of the stock 4 years from toclay?
Po. es
i'
constant growth stock
'.
. i!:,.
o*
"=
ffi",'
'
10. A stock that currently trades for P40 per hare is ExpEodEO to pay a year-end dividenrJ of P2
per
share. The dividend is expected to grow
at a constant rate over tlme. The stocl< has a
beta of 1,2, the risk-free rate ir; 5 percent, and the markett nisk premium is 5 percent, What
ls the stock's expected price seven years from today?
r=
E/.
* ,.o
("7.) ,lo
,J_-
P1
z go
(,.*),
fl NAN CIAL ATA I{AG E, M E N T I I lb"ge,y""'A.Mantlo
Decllnlng
trowth
stock
11. The Fortune Company has been hit hard due to increased competition.
'l'he
corngrany's
analysts predlct
that eamings (and dlvidends) wil! decline at a rate of 5 percent annually
forever. Assume that k.
=
11 percent and Do
=
P2.00, What witl be the price of the
company's stock three years from now?
Nonconstant growth stock
12. The last dlvldend paid by JV Company was P1.00. JVs growth rate is expected to be a
constant 5 percent for 2 years, after which dividends are expected to grow at a rate of 10
percent
forever. JV's requlred rate of return on equity (kr) ls 12 percent. What is the
current prlce
of J\ts common stock?
Do
'
\ Dr .
,.OS De
.
l.totS D5:
l.LlZtS
[,'
\$=
l'.
Nonconstant growth
stock
I
s7.
+
zUo
to7.
.1 qaslr.lr'r
tLl.
Fo. so.lso1
p1 ;
gg.lzf h'.
;;f,l-.16,
13. Bob UyTe tnc. (BUTI)
ls presently in a'stage of abnormally high growth
because of a surge in
the demand for motor homes. The company expect6 earnlngs and dividends to grow at a
ls-.l1trl
fate of 20 percent
for the nelG 4 years, after whlch tlme there will be no growth (g
=
0) tn
tb.totv
elrnlngs and dlvldends. The company's last dlvldend was P1.50. BUTI's beta ls 1.5, the
lo.B{o? return on the market ls currently 12.75 percent, and the risk-free rate ls 4 percent. What
t.t.rs
should be the current common stock price?
r
! qf.
+ t.c( n,ts7. -
q7.)
( a
lg't,
g E
Lo|,
4>
{go
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tz.)s7,
o
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.
Y7,
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l.sr)
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r)
t.
(
L.\G z.sqa c,Uot
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bz
t.G
Nonconstant growth
stock
14. ADB lndustrles expects to pay a P3.00 per share dividend on its common stock at the end of
?o,
51 o5
theyear. The divldend ls expected to grow 25 percenta y'ear until t
=
3, aflqr_which time
the-(lvlden{ is expected to grow at a constant rate of 5 percent
a year
6r_:
pf.oDs
and
C
.t'^.
--- ^-l-.
(=j9.*2fi751, The stock's beta is 1.2, the risk-free rate crf interest is 5 percent, and the
. market rate of return is 11 percent. What is the company's current stock price?
Pq
=
't9'
Div,
=
5 ,i er. *
t.t
( w'-
"r.)
----'- r----'
n.
Ls'|..
-+
ca,'5 .
1il.
tr/.
-+ co,\$qf
7.1
3 ,.'t5.
q.6\$s .{.9zrr?
5-
!
r
l.z
rk. 61"
Nonconstantgrowth stock
rH
- ll7.
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t
-lo_e.zs
15. Crlspy-one stock has a requirecl neturn of 11 percent. The stock currently doesh5tfiiy a
<--
.- -,1
dlvldend but lt expects to begin paying a dividend of P1.00 per share starting five years from
'\o:::
l- today (Ds
=
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expected to grow at a constant rate of 10 percent
ock price today?
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15. RiSa Company has been growlng at a 10 percent rate, ancl it
just pald a diMdend of P3.00.
Due to a new product, RiSa expects tp achleve a dramatic increase in its short-run gromh
rate, to 20 percent
annually for the next 2 years. After this time, growth
is expected to
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re&m to the long-run oonstant rate of 10 percent.
The company's beta ls 2.O the required
retum on an.average stock ls 11 percent,
and the rlsk-free rate is 7 percent. What should be
the dlvldend yield (Drlpo)today?
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17. An analyst is trylng to estimate the intrinsic value of the stock of SMBC. The analyst
estlmates that SMBC's free cash flow during the next year rrvill be P25 million. The analyst
also estimates that the company's free cash flow will increase at a constant rate of 7
percent
a year and that the company's WACC is 10 percent, SMBC has P200 million of long-
term debt and preferred
stock, and 30 mlllion outstanding shares of common stock. what
ls the estlmated per-share price of SMBC common stock?
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18' Today ls December 31, 2010. The followlng information applies to Addison Airlines:
Aftor-tax, operatlng income
[EBIT(I
- T)] for the year 2011 is expected to be P400 nrlllion.
The company's depreclation expense forthe year 2011is expected to be P80 miltion.
The company's capital expendltures for the year 2011 are expected to be P160 million,
No change is expected in the company's net operating rarorking capital.
The company's free cash flow ls expected to grow at a constant rate of 5 percent per
year.
The
company's cost of equity is 14 percent.
The company's WACC is 10 percent.
The current market value of the company's debt is P1.4 billion.
The company currently has 125 mlllion shares of stock outstanding.
tking the free cash flow valuation method, what should be the company's stock price
today?
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return to the long-run constant rate of 10 percent. The company's beta ls 2.0, the required
return on an average stock ls 11 percent, and the risk-free rate is 7 percent. What should be
.
the dlvldend yleld (Dr.,/Po)today?
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17. An analyst ls trylng to estimate the lntrlnsic value of the stock of SMBC. The analyst
estlmates that SMBC's free cash flow during the next year rrvill be P25 million. The analyst
also estimates that the company's free cash flow wlll increase at a constant rate of 7
percent a year and that the company's WACC is 10 percent. SMBC has P200 million of long-
term debt and preferred
stock, and 30 million outstanding shares of common stock. What
ls the estimated per-share price of SMBC common stock?
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18, Today ls December 31, 2010.
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The following information applies to Addison Airlines:
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a
a
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Aftor-tax, operatlng income
[EBIT(I
- T)] for the year 2011 is expected to be P400 mlllion.
The company's depreclation expense for the year 2011 is expected to be P80 million.
The company's capltal expenditures for the year 2011 are expected to be P160 million.
No change ls expected in the company's net operating urorking capital.
The company's free cash flow ls expected to grow at a constant rate of 5 percent per
year.
The
company's cost of equity is 14 percent,
The company's WACC is 10 percent.
The crrrent market value of the company's debt is P1.4 billion.
The company currently has 125 mlllion shares of stock outstanding.
tlsing the free cash flow valuation method, what should be the company's stock price
today?
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19, An analyst has collected the following information about VolVo Electric:
o
Prolected EBIT for the next year P300 million.
o
Prolected depreciation expense for the next year P50 mllllon.
o
Projected capital expenditures for the next year P100 million.
o
Projected increase in operating working capital next year P50 millicn.
o
Tax rate 40%.
o
WACC 10%.
o
Cost of equity 13%.
o
Market value of debt and preferred stock today P500 million.
o
Nunrber of shares outstanding today 20 million.
The company's free cash flow is expected to grow at a constant rate of
6 percent a year. The analyst uses the corporate value model approach to estimate the
stoclCs lntrlnslc value. What is the stocKs lntrinsir value today?
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20. The nrarket value of FlNman Company's equity is P30 million, and the market value of it's
rlsk free debt P10 million. lf the requirea
gtfflreturn
on the equity is 20% and that on
debt ls 8%, calculate the FlNman's cost of .Liiiffif assume no taxes,
(b)
assume 35% tax.
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