finance work 2

QUESTION1

You are a financial analyst at Bank of America and you have collected following information for Lotus Tech Company. The company has beta of 1.5 and a ROE of 20%. The dividend payout ratio is 50%. Last twelve month earnings were $4 per share. The annual dividend was just paid. The consensus estimate of the coming year’s market return is 11%, and T-bills currently offer a 8% return.

(keep two decimal places please.) a.   What is the required rate of return of the stock? (input format: 15.32%) b.   What is the growth rate of the stock? (input format: 15.32%) c.   What is the intrinsic value of the stock? (input format: $15.32) d.   What is PVGO of the stock? (input format: $15.32) e.   Suppose your research convinces you that company will announce momentarily that it will immediately change its dividend payout ratio to 75%. Find the intrinsic value of the stock. (input format: $15.32)

Question 2

Suppose you are an analyst in pharmaceutical industry for Bank of America. You collect the following data to estimate the expected growth rate of dividends and use it as an input for valuing an oil company’s common stock.

Return on Assets	10%
Profit Margin	8%
Debt/Equity	4.5
Payout Ratio	40%

a.  The leverage ratio of this company is (sample answer: 3.50) b.  The company’s expected growth rate is (sample answer: 25.60%)

QUESTION 3

The following table lists the Income statement and Balance sheet for First American Furniture Company

I ncome Statement	2020	2021
Revenue	516	630
Depreciation	30	35
Other operating costs	400	480
Income before taxes	86	115
Taxes	30	44
Net income	56	71
Dividends	20	26
Earnings per share	0.56	0.71
Dividend per share	0.2	0.26
Common shares outstanding (millions)	100	100

Balance Sheet	2020	2021
Current assets	350	420
Net property, plant, and equipment	500	520
Total assets	850	940
Current liabilities	130	150
Long-term debt	50	80
Total liabilities	180	230
Shareholders’ equity	670	710
Total liabilities and equity	850	940
Capital expenditures	45	50
Net Working Capital	220	270

You are a financial analyst at RBC. Using the data above, you want to determine the value of First American Bank’s stock using the Free Cash Flow to Equity (FCFE) model. You believe that the company’s FCFE will grow at 35% for three years and 11% thereafter. Capital expenditures, depreciation, working capital, and net debt are all expected to increase proportionately with FCFE. The required rate of return on equity is 16%.

a. Calculate the amount of FCFE per share for the year 2021.(sample answer: $5.15) b. Calculate Projected 2024 terminal value per share based on constant growth of 11% (sample answer: $25.15) c. Calculate the current value of a share of the stock based on the two-stage FCFE model. (sample answer: $25.15)