Using data from our fictitious Company, AB 217 (from Unit 3), We will calculate the expect value of its stock using the Constant

Using data from our fictitious Company, AB 217 (from Unit 3), We will calculate the expect value of its stock using the Constant Growth Model (page 114): Po = D1/(r - g) To do that we will have to estimate the vales of r, g, and D1.

To estimate the value of r we will use the Capital Asset Pricing Model:

CAPM = Rf + Beta(Rm - Rf) Where:

Risk Free Rate = Rf = 3.5%

Market Return = Rm = 12%

Beta of BA 217 Corp. = .85

Question 1: Calculate "r".

Next we estimate the value of "g" using the average growth rate of past dividends.

Assume 6 years ago AB 217 paid a dividend of $1.20 and this year they paid a dividend of $1.55, using the Excel RATE formula calculate the average growth rate it took for the dividend to the current level in the period of time.

Question 2: Calculate "g".

Next we estimate the value of D1, the dividend next year as required by the Constant Growth Model.

D1 = Do(1 + g), where Do = the dividend today, $1.55 Unit 6 [Finance] 2

Question 3: Calculate "D1".

Using your solutions estimate the value of AB 217 Corporation's stock using the Constant Growth Model.

Po = D1/(r - g)

Question 4: Calculate the estimated value or Price Today of AB 217 = "Po".

Finally comment on this question. If the actual market value was BELOW your estimated value of AB217, and you were highly confident in your assumptions, what action might you take?

show work company info:

Company X Income Statement for the Period Ended of 12/31/2010

(in millions)

Net sales $87,500

Cost of Goods Sold 81,813

Gross Margin 5,687

Depreciation 1,531

Earnings Before Interest and Taxes (EBIT) 4,156

Interest Expense 1,375

Earnings before taxes (EBT) 2,781

Taxes 973

Net income $ 1,808

Company X Balance Sheet as of 12/31/2010

(in millions)

Current Assets Current Liabilities

Cash 104$ Accounts Payable 232$

Accounts Receivable 455 Notes Payable 196

Inventory 553

Total Current Assets 1,112 Total Current Liabilities 428

Net Fixed Assets 1,644 Long Term Debt 408

Total Assets 2,756$ Total Liabilities 836

Owners Equity

Common Stock 600

Retained Earnings 1,320

Total Common Equity 1,920

Total Liabilities and

Owners Equity 2,756$

Other Information

Number of Shares Outstanding 76.80 Million

(Market) Current Share Price 78.62$ per share template answer sheet:

Using data from our fictitious company, we are going to calculate the expect value of its stock using the Constant Growth Model (page 114): Po = D1 / (r – g). To do that we will have to estimate the vales of r, g, and D1.

Question 1: Calculate "r" Formulas Needed Where:

Risk Free Rate (Rf) in % =

Market Return (Rm) in % =

Beta = CAPM = r = <-------- CAPM = (Rf + Beta x (Rm – Rf)) / 100

Question 2: Calculate "g"

Estimated value of “g” (%) = <-------------------- =(RATE(6,,-1.2,1.55) / 1)*100

Question 3: Calculate "D1" Where:

Do ($) = $1.55

g = 0.0000

Estimated value of “D1” = <------------------------------------- P1 = Do x (1 + g)

Question 4: Calculate "P0" Where:

D1 (from B24) = 0

r (from B13) = 0.0000

g (from B23) = 0.0000

Po ($) = <-------------------------------------- Po = D1 / (r – g)

Comment:

Actual Market Value = $25.00

Estimated Value = 0

Question: If the actual market value was BELOW your estimated value of AB217, and you were highly confident in your assumptions, what action might you take?