Wenyu Li MINI CASE Essay

A constant annual rate of dividend growth of 9 per cent is expected on a particular

As mentioned in the introduction of the mini case, Hobby Horse Company, Inc. (HH) experienced a tough year in 2011. HH opened up a number of new stores but experienced a poor Christmas season. Christmas season is the biggest sale period for retail stores. As a result, bad Christmas sales performance played a big part of HH’s loss for year 2011. As we computed the financial ratios for HH, we can see the effects from new stores openings and poor sales performance.

b. Free cash flow is the net cash flow from operations less the capital expenditures (Peavler, 2012). Free cash flow is important because it is the cash flow that is "beyond what is necessary to maintain assets in place and to finance expected new investments (Richardson, 2006). Free cash flow is used to finance existing operations, expand existing operations, pay down debt, pay out dividends and to maintain existing assets in place. The free cash flow of PetSmart is $400.263 million, according the PetSmart's 10-K for the year ended January 29, 2012. This information is found on page 30.

Some applications of dividend discount modeling can be more complex. One method divides the future growth in dividends into three periods, all of which have different growth rates. This is useful when a company’s profits are expected to grow rapidly and then gradually decline to an industry average. The complexities of this model are outside of the scope of this report, and the model can easily be run using tools found online. The assumptions of this calculation as follows. Walmart is no longer in a growth phase, so this calculation assumes that it is at the transitional phase. Because of this, 2007 data is used to initialize the calculation (EPS, dividend, etc.,) and the ‘growth’ period was 3 years. Initial growth of EPS still assumed to be 10.4%. 14 transitional years, as required by the model (total of 17 years for growth and transition is required). All of these assumptions result in a 3 stage DDM

Suppose you are the network manager for Central University, a medium-size university with 13,000 students. The university has 10 separate colleges (e.g., business, arts, journalism), 3 of which are relatively large (300 faculty and staff members, 2,000 students, and 3 buildings) and 7 of which are relatively small (200 faculty and staff, 1,000 students, and 1 building). In addition, there are another 2,000 staff members who work in various administration departments (e.g., library, maintenance, and finance) spread over another 10 buildings. There are 4 residence halls that house a total of 2,000 students. Suppose the university has the 128.100.xxx.xxx address

The next step was to calculate the free cash flows for the eleven-year period. In order to do so, we used to following formula: FCF = EBIT(1-tax) + depreciation - change in NWC – CapEx. From here, we used to WACC of 13.89% previously calculated, in order to find the present value of each FCF.

tment. Or, at least, some comparative position, mea- suring the merits of du Pont vs. American Telephone. For such comparative purposes, it will be useful to examine the effects on valuation of extreme rates of growth. The ana- lyst may well decide that a 10% rate of growth is a prac- tical top limit for companies of any size under present competitive conditions, stretching that a bit for I.B.M. and a few others. Of course, since we have put a finite limit on years, involving a tragic ending, logic decrees a declin- ing rate of growth and then a

The case I found more compelling was the case of Huang Xian. His case was shocking, he did not he had his body that bad. He had broken veins, broken bones of his hand and he had wounds on his body. If it had not been for the doctor that orders him a checkup he had not known how bad his health and his body were. I was compassionate about his case and how much he suffers. One of the things that save him during he was a prisoner was writing poems to his wife.

• Pe = D1/(re – g) = 700 / (0.11 – 0.05) = $11,667 • price per share = $11,667 / 1,000 = $11.67 3. Same facts as (2) above, except the 5% income growth rate (and beginning of year common equity to support it) are only expected for years 2 and 3. Then growth is expected to be zero and all income is expected to be distributed to shareholders for all future years. a. Compute D1, D2, D3, and Dt for all future years. • Keeping in mind that income is $1,100 in year 1, increases by 5% in years 2 and 3, and then remains constant for all future years; and keeping in mind that beginning of year 1 common equity is $8,000, increases by 5% at the beginning of year 2 and at the beginning of year 3, but does not increase at the beginning of year 4 and remains constant from that point forward, you should be able to compute: D1 = $700, D2 = $735, and Dt = 1,212.75 for D3 and all future years. b. Use the dividend discount (i.e., free cash flow to equity investors) valuation model to estimate the company’s current stock price. Pe = 700/(1+ 0.11) + 735/(1+ 0.11)2 + [1,212.75/0.11]/(1+ 0.11)2 = $10,175.31 and the price per share of common stock = $10,175.31 / 1,000 = $10.18. 4. Same facts as (3) above, except the growth rates are 5% for years 2 and 3 and then 3% perpetually for all future years. a. Compute D1, D2, D3 and the growth in D for all future years. • Keeping in mind that income is $1,100 in year 1, increases by 5% in years 2

Using the data provided in Exhibit 1, we can get free cash flow of year 2007-2011 would be $21.24 million, $26.73 million, $22.10 million, $25.47 million, and $29.54 million respectively. The computation is showed in Exhibit 1($ in thousands).

FIN 600 – Lecture 3 Discounted Cash Flow Valuation Chapter Outline Time Value of Money Valuation: The One-Period Case The Multiperiod Case Compounding Periods Simplifications What Is a Firm Worth? Time Value of Money    

FCF = NOPLAT – Net Investment in IC, NOPLAT = EBITA x (1 – T)

Every assets have to be valued in order to take an investment decision, and their sources have to been understood as well. Various methods of valuation can be used, and a certain degree of uncertainty exists.A valuation is uncertain. A good valuation does not provide a precise estimate of value.Nevertheless, a valuation enables to get a large overview in order to take an investment decision.For that reason valuation is a strategic aspect in many areas of finance. In corporate finance, the firm’s value aims to be as high as possible and will have an effect on corporate decisions, including projects to develop and where to find funds, and on the dividend policy.

Operating cash flow results from the firm 's normal business activities. Operating cash flow is calculated the net income against items such as changes to accounts receivable, changes in inventory, and depreciation (Farshadfar & Monem, 2013). It measures whether an organization can

In summary, the discounted cash flow (DCF), or dividend-yield-plus-growth-rate, is a process used to estimate the cost of equity an investor expects to receive. It takes the dividend yield plus a capital gain for a total expected return. Current stock price, current dividend and the marginal investor’s expected dividend growth rate are three inputs required to use the DCF approach. The stock price and current dividend are easy to obtain, however the expected growth rate is difficult to estimate. Three techniques used to estimate growth rate include: historical growth rate, retention growth model and analysts’ forecast. DCF analysis can help investors identify where the company’s value is coming from and whether or not its current share price is justified. It is also the closest thing to a company’s intrinsic value. Another advantage of using DCF is that the current stock price is used instead of