Question 1 Suppose a firm’s free cash flows are expected to be $27,157 at the en

Question

Question 1 Suppose a firm’s free cash flows are expected to be $27,157 at the end of the current period and are expected to grow three percent each period thereafter. If the cost of capital is 11.8-percent per period and the market value of debt is $149,621, calculate the fair market value of the equity capital i.e. market capitalization.

Question 2 Suppose a firm’s free cash flows are expected to be $24,621 at the end of the current period and are expected to grow three percent each period thereafter. If the cost of capital is 10.9-percent per period and the market value of debt is $123,105, calculate the fair market value of a single share of stock if there are 8,000 shares outstanding.

Question 3 What is the price of a stock with a price to earnings ratio of 14 and earnings per share of $2.5?

Question 4 Suppose a common stock pays dividends at the end of each period and the stock has just paid a dividend in the amount of $2.6. If the stock's dividend growth rate is 5.1-percent per period and the discount rate is 11.4-percent per period, what is the expected return from capital gain in the next period based on the fair value from the constant growth stock valuation model.

Question 5 Suppose a firm pays a dividend on it's stock at the end of every period, the stock beta is 1.2, the firm just paid a dividend in the amount of $3.8, and dividends are expected to grow two percent every period forever. If the expected return on the market is 10.2-percent and the risk free rate is 2.5-percent, what is the most you should pay for the stock based on the CAPM and constant growth stock valuation model.

Please show all work.

Explanation / Answer

Amt $      1.0 Free Cash Flow expected             27,157.0 Expected Growth rate =g= 3% Cost of Capital = 11.80% Market Value of firm =27157*1.03/(0.118-0.03)= $ 317,860.34 Market Value of Debt         149,621.0 So Market Value of Equity=         168,239.3      2.0 Free Cash Flow expected             24,621.0 Expected Growth rate =g= 3% Cost of Capital = 10.90% Market Value of firm =24621*1.03/(0.109-0.03) $ 321,007.97 Market Value of Debt         123,105.0 So Market Value of Equity=         197,903.0 Common shares outstanding              8,000.0 Price per stock= $             24.74 q3. P/E ratio=                    14.0 EPS =                      2.5 Price = 14*2.5=                    35.0 Q4 Current Dividend D0=                      2.6 Dividend Growth rate =g= 5.1% Required Return = 11.4% Current Price =2.6*1.051/(0.114-0.051) $             43.37 Expected dividend Net Year =                    2.73 Expected Price next year=2.73*1.051/(0.114-0.051)= $             45.59 Capital Gain = $               2.21 Capital Gain %=2.21/43.37= 5.10% Q5 Expected market return =Rm= 10.20% Risk Free rate = 2.50% Stock Beta =                      1.2 Required Return on Stock =Rf+(Rm-Rf)*Beta =2.5%+1.2*(10.2%-2.5%)= 11.74% Current Dividend =D0=                      3.8 Dividend growth rate = 2.0% Required return rate= 11.74% Current Stock value=3.8*1.02/(0.1174-0.02)=                    39.8 So the maximum stock price I can pay= $             39.79

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