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    Anna Guiling
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    This document contains 5 problems related to stock valuation using various methods: 1) Preferred stock valuation for a stock with $80 par value and 6.4% annual dividend given market required return of 9.3% 2) Common stock valuation using constant growth model for stock paying $1.50 dividend expected to grow at 5% given required return of 12% 3) Common stock valuation using constant growth model for stock paying $1.20 dividend expected to grow at 6% or 8% 4) Common stock valuation using variable growth model for stock with initial 8% growth for 3 years then 5% constant growth given required return of 11% 5) Company valuation using free cash flow model with costs

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    This document contains 5 problems related to stock valuation using various methods: 1) Preferred stock valuation for a stock with $80 par value and 6.4% annual dividend given market required return of 9.3% 2) Common stock valuation using constant growth model for stock paying $1.50 dividend expected to grow at 5% given required return of 12% 3) Common stock valuation using constant growth model for stock paying $1.20 dividend expected to grow at 6% or 8% 4) Common stock valuation using variable growth model for stock with initial 8% growth for 3 years then 5% constant growth given required return of 11% 5) Company valuation using free cash flow model with costs

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    100 views1 page

    Stocks Drills

    Uploaded by

    Anna Guiling
    This document contains 5 problems related to stock valuation using various methods: 1) Preferred stock valuation for a stock with $80 par value and 6.4% annual dividend given market required return of 9.3% 2) Common stock valuation using constant growth model for stock paying $1.50 dividend expected to grow at 5% given required return of 12% 3) Common stock valuation using constant growth model for stock paying $1.20 dividend expected to grow at 6% or 8% 4) Common stock valuation using variable growth model for stock with initial 8% growth for 3 years then 5% constant growth given required return of 11% 5) Company valuation using free cash flow model with costs

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    © All Rights Reserved
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    of 1

    Stock Valuation Drills

    Preferred Stock Valuation


    1. Palm Rock Design wishes to estimate the value of its outstanding preferred stock. The preferred
    issue has an Php80 par value and pays an annual dividend of Php6.40 per share. Similar-risk
    preferred stocks are currently earning a 9.3% annual rate of return.
    A. What is the market value of the outstanding preferred stock?
    B. How much does he gain or lose per share if he sells the stock when the required return on
    similar-risk instrument has risen to 10.5%?

    Common Stock Value – Constant Growth


    2. Virgin, Inc. is expected to pay a dividend of Php1.50 at the end of the year and it should continue
    to grow at a constant rate of 5% a year.
    A. If its required return is 12%, what is the stock’s expected price 4 years from today?
    B. If the stock has a market price of Php25.00 on the year 4, would you buy the Virgin stock?
    Why? Why not?

    3. MJ Roofing, Inc. common stock paid a dividend of Php1.20 per share last year. The company
    expects earnings and dividends to grow at a rate of 6% per year for the foreseeable future.
    A. What required rate of return for this stock would result in a price per share of Php28?
    B. If MJ Roofing expects both earnings and dividends to grow at an annual rate of 8%, what
    required rate of return would result in a price per share of Php28?

    Common Stock Value – Variable Growth


    4. Newcrest Industries’ most recent annual dividend was Php1.80 per share with a required return
    of 11%. What is the market value of Newcrest’s shares when dividends are expected to grow at
    8% annually for 3 years, followed by a 5% constant annual growth rate in years 4 to infinity?

    Free Cash Flow Valuation


    5. Gerry Corporation is considering going public but is unsure of a fair offering price for the
    company. Before hiring First Metro Investment Corp. to assist in making the public offering,
    managers at Gerry have decided to make their own estimate of the firm’s common stock value.
    The firm’s CFO has gathered data for performing the valuation using the free cash flow valuation
    model.
    The firm’s weighted average cost of capital is 11% and it has Php1,500,000 of debt at market
    value and Php400,000 of preferred stock at its assumed market value. The estimated free cash
    flows over the next 5 years, 2010 through 2014, are given below. Beyond 2014 to infinity, the
    firm expects its free cash flow to grow by 3% annually.
    Year (t) Free Cash Flow (FCF)
    2010 Php200,000
    2011 250,000
    2012 310,000
    2013 350,000
    2014 390,000

    A. Estimate the entire company value.


    B. What is the amount of the common stock value?
    C. If the company plans to issue 200,000 shares of common stock, what is its estimated value per
    share?

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