Please show work. 1. (common stock valuation, constant growth) You’ve discovered
ID: 2713138 • Letter: P
Question
Please show work.
1. (common stock valuation, constant growth) You’ve discovered a company that is expected to pay $2.25 dividend at the end of this year. The dividend is expected to grow forever at a constant rate of 4% a year. The required rate of return for this stock is 8%. Given these conditions, what is the estimated market value per share of this stock?
2. (common stock valuation, non-constant growth) You’ve discovered a company that is expected to pay $2.25 dividend at the end of this year. You estimate the company’s dividends will grow 10% next year and then at a constant rate of 4% thereafter. The required rate of return for this stock is 8%. Given these conditions, what is the estimated market value per share of this stock?
3. (The PE model) Imagine you are estimating the market value of Wild West Oil Company’s stock, which is not publicly traded. So you decide to use the PE model for your valuation. You observe the following PE Ratio comparisons for your project:
Company PE Ratio (from the Internet)
a. Exxon-Mobil 10
b. Chevron 11
c. ConocoPhillips 14
a. What is the implied “appropriate” PE for Wild West Oil Company?
b. Assuming Wild West Oil Company’s EPS is = $3.10, what is your estimate for the market value of the company’s stock?
4. (Preferred stock valuation) You have discovered a company which has issued preferred stock with a stated annual dividend of 6% of its par value of $100. The average yield on preferred stock of this type among other companies is 7%. Given these conditions, what is your estimate of the market value of this company’s preferred stock?
Explanation / Answer
Question 1
Expected Dividend (D1) = 2.25
Rate of Return (R) = 8%
Constant Growth Rate (g) = 4%
Market Value per share = D1/(R-g) = 2.25/(8%-4%) = 56.25
Question 2
Year
Dividend
DF @ 8%
PV
1
2.25
0.925926
2.08
2
2.475
0.857339
2.12
Present Value
4.21
Expected Dividend for 3rd year
2.57
Present Value at end of 2nd year
64.35
Present Value today
55.17
Value of Stock
59.38
Question 3
Company
PE Ratio
Exxon Mobil
10
Chevron
11
Conoco Phillips
14
Average PE Ratio
11.67
Thus, implied PE for Wild West is 11.67
Market Value = 3.10*11.67 = 36.17
Question 4
Annual Dividend = 6
Yield = 7%
Value = 6/7% = 85.71
Year
Dividend
DF @ 8%
PV
1
2.25
0.925926
2.08
2
2.475
0.857339
2.12
Present Value
4.21
Expected Dividend for 3rd year
2.57
Present Value at end of 2nd year
64.35
Present Value today
55.17
Value of Stock
59.38