| Caterina Vazquez |
| Unit 6 Challenge Problem Template |
| 1. Fasco Industries just paid a dividend of D0 = $1.45. Analysts expect the company's dividend to grow by 28% this year, by 11% in Year 2, and at a constant rate of 6% in Year 3 |
| and thereafter. The required return on this low-risk stock is 11.00%. What is the best estimate of the stock’s current market value? |
| 2. Why are cash flows that are connected to common stock difficult to estimate? How does this compare to those related to bonds. |
| Problem: | Fasco Industries |
| Return on Stock (Rs) = | | 11.00% | | | | | | | | | | | notes |
| | | | | | | | | | | | | | Stock Price = the Sum of the Present Value of All Future Dividends |
| Year | | 0 | 1 | 2 | 3 | | | | | | | | P0(price today) = 1.85/1.11^1 + 2.05/1.11^2 + 43.40/1.11^2 = $38.55 |
| Growth Rates | | | 28.00% | 11.00% | 6.00% |
| Dividend | | $ 1.45 | $ 1.86 | $ 2.06 | $ 2.18 |
| Value in T2 = D3/(r-g3) | | | | $ 43.68 |
| | | | $ 1.86 | $ 45.74 |
| Total Cash Flows |
| PV of Cash Flows |
| PV = FV/(1 + i)^n | | | $1.67 | 1.67 |
| Here i = r |
| Estimated Stock Price = |
| 2. Why are cash flows that are connected to common stock difficult to estimate? How does this compare to those related to bonds. |
| Cash flows connected to common stock are difficult to estimate because you will always have to make assumptions |
| about the growth rate of the earnings meanwhile, bond cash flows are set at time of issue (at Face Value times the coupon rate). |
Caiden
help-with-problem.xlsx
