Managerial Finance

{?.1$J Free Cash Flow

Valuation

Challenging Problems 1F21

(7-7e)

Constant Growth Stock Valuation

i7'?*) Nonconstant Growth

Stock Valuation

Part 3 Stocks and Options

a. What is the terminal, or horizon, value of operations? (Hirrf; Find the value of all free cash flows beyond Year 2 discounted back to Year 2.)

b. Calculate the value of Kendra's operations.

Dozier Corporation is a fast-grorving supplier of office products. Analysts project the following free cash flows (FCFs) during the next 3 years, after which FCF is expected to grow at a constant 7o/o rate. Dozier's weighted average cost of capital is WACC = 13o/o.

Year

Free cash flow ($ millions) -$20 $s0 $40

b.

c.

\\rhat is Dozier's terminal, or h.rrizon, value? (Hlnf: Find the value of all free cash flows beyond Year 3 discounted back to Year 3.) What is the current value of operations for Dozier? Suppose Dozier has $10 rnillion in marketable securities, $100 million in debt, and l0 million shares of stock. What is the intrinsic price per share?

You are analyzing Jillian's Jeivlery (iJ) stock for a possible purchase. fl just paid a dividend of 51.50 1;esterday.You expect the dividend to grow at the rate of 6% per year for the next

3 years; ifyou buy the stock, you plan to hold it for 3 years and then sell it'

a. What dividends do you expect for i| stock over the next 3 years? In other words, calculate D,, Dr, and l)3. Note that Do = $1.50.

b. Ji's stock l'ras a i:equired return of l3?o and so tiris is tlie rate you'Il use ttl discount dividends. Find the present value of the dividend stream; that is, calculate the P\r of Dr, Dr, and D3, and then sum tirese PVs.

c. J.[ stock should trade for 527.05 3 years 1iom nolv (i'e., ]rou expect I': = $27.05). Discounted at a l3o/o rate, rvhat is the present vaiue of this expected future stock price? In other words, calculate the P\r of $27.05.

d. if'you pian to buy the stock, hold it fr:r 3 years, and ther.r sell it lor $27.05, what is the most you should pay for it?

e. Use the constant grolvth model to calculate tire present vaitte of this stock. Assume

that e = 60lo and is constant. f. Is the value of this stock dependent on how long you pian to hold it? In other rvords,

if your planned holdine period were,2 years or 5 years rather than 3 years, wouid this

affect the value of the stock today, Pn? Explain vour answer.

Reizenstein Technologies (RT) has just developed a solar panel capable of generating 200% more electricity than any solar panel currentlv on tl.re rnarket. As a result, RT is expected to experience a l57o annual grorvth rate for the next 5 years. tsy the end of 5 years, other flrms will have developed comparable technolclgy, and R-l"s grou,th rate rvill s1o'lv to 5o/o per year indefinitely. Stockholders require a return c:f 12% on RT's stock. The most recent annual dividend (D1v), which was paid yesterday, rvas $1.75 per share.

a. Calculate RT's expecteri dividends for t = 1, t = 2, t = 3, t.; 4, and t = 5. b. Calculate the estimated intrinsic value of the stock todav, P6. Proceed by finding the

present value of the dividends expected at t = I , t = 2, t = 1, t = 4, and t = 5 plus the present value ofthe stock price tirat should exist at t = 5, t;. The i, slock price can

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