Tutorial 11

1. In what circumstances would you choose to use a dividend discount model rather thana
free cash flow model to value a firm ?
2. In what circumstances is it most important to use multistage dividend discount models
rather than constant-growth models ?
3. If a security is underpriced (i.e. intrinsic value > price), then what is the relationship
between its market capitalisation rate and its expected rate of return ?
4. Deployment Specialists pays a current (annual) dividend of $1 and is expected to grow
at 20% for 2 years and then at 4% thereafter. If the required return for Deployment
Specialists is 8.5%, what is the intrinsic value of its stock ?
5. Jand Inc currently pays a dividend of $1.22, which is expected to grow indefinitely at
5%. If the current value of Jand’s shares based on the constant-growth dividend
discount model is $32.03, what is the required rate of return ?
6. A firm pays a current dividend of $1, which is expected to grow at a rate of 5%
indefinitely. If the current value of the firm’s shares is $35, what is the required return
applicable to the investment based on the constant-growth dividend discount model
(DDM) ?
7. Tri-coat Paints has a current market value of $41 per share with earnings of $3.64. What
is the present value of its growth opportunities (PVGO) if the required return is 9% ?
8. A firm has current assets that could be sold for their book value of $10 million. The
book value of its fixed assets is $60 million, but they could be sold for $90 million
today. What is the market-to-book ratio ?
9. The market capitalisation rate for Admiral Motors Company is 8%. Its expected ROE
is 10% and its expected EPS is $5. If the firm’s plowback ratio is 60%, what will be its
P/E ratio ?
10. Miltmar Corporation will pay a year-end dividend of $4 and dividends thereafter are
expected to grow at the constant rate of 4% per year. The risk-free rate is 4% and the
expected return on the market portfolio is 12%. The stock has a beta of 0.75. What is
the intrinsic value of the stock ?