For Suzikane Only

12/7/2012

Chapter:7

Problem:23

Selected data for the Derby Corporation are shown below. Use the data to answer the following questions.

INPUTS (In millions)

Current

01234

Free cash flow-$20.0$20.0$80.0$84.0

Marketable Securities$40

Notes payable$100

Long-term bonds$300

Preferred stock$50

WACC 9.00%

Number of shares of stock40

Current

01234

Free cash flow-$20.0$20.0$80.0$84.0

Long-term constant growth in FCF

Horizon value

PV of horizon value

PV of FCF

Value of operations (PV of FCF + HV)

Value of operations

Plus value of narketable securities

Total value of company

Less value of debt

Less value of preferred stock

Estimated value of common equity

Divided by number of shares

Price per share

Year

c. Calculate the estimated Year-0 price per share of common equity.

b. Calculate the present value of the horizon value, the present value of the free cash flows, and the

estimated Year-0 value of operations.

Projected

a. Calculate the estimated horizon value (i.e., the value of operations at the end of the forecast period

immediately after the Year-4 free cash flow).

Projected

12/7/2012

Chapter:7

Problem:22

a. What is Hamilton's estimated stock price today?

D

0

$2.50

r

s

11.0%

g

0,1

30%Short-run g; for Year 1 only.

g

1,2

15%Short-run g; for Year 2 only.

g

L

5%Long-run g; for Year 3 and all following years.

g30%15%5%5%

Year0123

Dividend

PV of dividends and

PV of horizon value

= D

2

(1+g) = D

3

= Horizon value = P

2

=

= r

s

– g

L

$0.0000 = P

0

a. What is Hamilton's estimated stock price for Year 1?

P

2

+D

2

+

P

1

=

1. Find the expected dividend yield.

Dividend yield =D

1

/P

0

Dividend yield =/

Dividend yield =

2. Find the expected capital gains yield.

Use the estimated price for Year 1, P

1

, to find the expected gain.

Cap. Gain yield=(P

1

– P

0

)/P

0

Cap. Gain yield=/

Cap. Gain yield=

Cap. Gain yield=Expected return

–

Dividend yield

Cap. Gain yield=

–

Cap. Gain yield=

1. Find the expected dividend yield.

Dividend yield =D

2

/P

1

Dividend yield =/

Dividend yield =

2. Find the expected capital gains yield.

Use the estimated price for Year 2, P

2

, to find the expected gain.

Cap. Gain yield=(P

2

– P

1

)/P

1

Cap. Gain yield=/

Cap. Gain yield=

Cap. Gain yield=Expected return

–

Dividend yield

Cap. Gain yield=

–

Cap. Gain yield=

Alternatively, the capital gains yield can be calculated by simply subtracting the dividend yield from the total expected

return.

P

1

=

Alternatively, the capital gains yield can be calculated by simply subtracting the dividend yield from the total expected

return.

b. If you bought the stock at Year 0, what your expected dividend yield and capital gains for the upcoming year?

c. What your expected dividend yield and capital gains for the second year (from Year 1 to Year 2)? Why aren't these

the same as for the first year?

Hamilton Landscaping's dividend growth rate is expected to be 30% in the next year, drop to 15% from Year 1 to Year

2, and drop to a constant 5% for Year 2 and all subsequent years. Hamilton has just paid a dividend of $2.50 and its

stock has a required return of 11%.

P

1

=

(1 + r

s

)