Stock Case Peach Tree

8) What would BV's 1988 earnings per share be after all of the above adjustments?

b.What are the amounts and timing of the acquisition investment’s free cash flow from 2013 through 2022?

Assumptions need to be made for the Cost of Equity. We used the corporate rate of 11.766%

a. Calculate the expected return over the 4-year period for each of the three alternatives.

What was the firm’s historical dividend growth rate using the point-to-point method? Using the linear regression method?

9. You want to purchase a business with the following cash flows. How much would you pay for this business today assuming you needed a 14% return to make this deal?

Dividends were assumed to grow at the geometric average of the last 6 years, 20.28%. P0 = D2 Dn Pn D1 + + ··· + + 1 2 n (1 + Ke ) (1 + Ke ) (1 + Ke ) (1 + Ke )n $1.58 $2.28 $87.31 $1.31 + + ··· + + = 1 2 4 (1 + 7.0%) (1 + 7.0%) (1 + 7.0%) (1 + 7.0%)4 = $72.53

For g, we are given that the dividend has grown from $0.82 to $1.20 in four years. We use the compound interest formula to get the growth rate

a. What risk-free rate and risk premium did you use to calculate the cost of equity?

$10,644,800 / $2,271,400 = 4.69 Times Return on Common Stockholders’ Equity (2002) $647,645 / $1,928,960 = 33.58% Return

What are the expected dividend yield and capital gains yield during the fourth year (from Year 3 to Year 4)?

Solutions to Valuation Questions 1. Assume you expect a company’s net income to remain stable at $1,100 for all future years, and you expect all earnings to be distributed to stockholders at the end of each year, so that common equity also remains stable for all future years (assumes clean surplus). Also, assume the company’s β = 1.5, the market risk premium is 4% and the 20-30 year yield on risk free treasury bonds is 5%. Finally, assume the company has 1,000 shares of common stock outstanding. a. Use the CAPM to estimate the company’s equity cost of capital. • re = RF + β * (RM – RF) = 0.05 + 1.5 * 0.04 = 11% b. Compute the expected net distributions to stockholders for each future year. • D = NI – ΔCE = $1,100 – 0 = $1,100 c. Use the

b. What is your estimate of Return on Assets in 1983? (Assume a 40% tax rate.) How is the company doing in 1983? For simplicity, you may assume that individual price and cost components have not changed 1983 and 1985.

Corporate Finance ADM 3350 M & P (Winter 2015) Assignment 1 Due Date: February 23, 2015 Question 1 (5 Marks) Varta Inc. has just issued a dividend of $1.50 per share on its common stock. The company paid dividends of $1.10, $1.15, $1.25, and $1.37 per share in the last four years. The stock currently sells for $48. a. What is your best estimate of the company's cost of equity capital using the arithmetic average growth rate in dividends? b. What if you use the geometric average growth rate? Solution: (3 + 2 = 5 Marks)

1. If you bought a share of stock, what would you expect to receive, when would you expect to receive it, and would you be certain that your expectations would be met?