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Comprehensive/Spreadsheet Problem NONCONSTANT GROWTH AND CORPORATE VALUATION Rework problem 9-18, parts a, b, and c, using a spreadsheet model. For part b, calculate the price, dividend yield, and capital gains yield as called for In the problem. After completing parts a through c, answer the following additional question, using the spreadsheet model. d. TTC recently introduced a new line of products that has been wildly successful. On the basis of this success and anticipated future success, the following free cash flows were projected: After the tenth year, TTC’s financial planners anticipate that its free cash flow will grow at a constant rate of 6%. Also, the firm concluded that the new product caused the WACC to fall to 9%. The market value of TTC’s debt is $1,200 million; it uses no preferred stock; and there are 20 million shares of common stock outstanding. Use the corporate valuation model to value the stock. 9-18 NONCONSTANT GROWTH STOCK VALUATION Taussig Technologies Corporation (TTC) has been growing at a rate of 20% per year in recent years. This same growth rate is expected to last for another 2 years, then decline to g n =6%. a. If D 0 = $1.60 and r s = 10%, what is TIC’s stock worth today? What are its expected dividend, and capital gains yields at this time, that is, during Year 1? b. Now assume that ITC’s period of supernormal growth is to last for 5 years rather than 2 years. Flow would this affect the price, dividend yield, and capital gains yield? Answer in words only. c. What will TTC’s dividend and capital gains yields be once its period of supernormal growth ends? (Hint: These values will be the same regardless of whether you examine the case of 2 or 5 years of supernormal growth; the calculations are very easy.) d. Explain why investors are interested in the changing relationship between dividend and capital gains yields over time.

BuyFind

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781285867977
BuyFind

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781285867977

Solutions

Chapter
Section
Chapter 9, Problem 22SP
Textbook Problem

Comprehensive/Spreadsheet Problem

NONCONSTANT GROWTH AND CORPORATE VALUATION Rework problem 9-18, parts a, b, and c, using a spreadsheet model. For part b, calculate the price, dividend yield, and capital gains yield as called for In the problem. After completing parts a through c, answer the following additional question, using the spreadsheet model.

d. TTC recently introduced a new line of products that has been wildly successful. On the basis of this success and anticipated future success, the following free cash flows were projected:

Chapter 9, Problem 22SP, Comprehensive/Spreadsheet Problem NONCONSTANT GROWTH AND CORPORATE VALUATION Rework problem 9-18,

After the tenth year, TTC’s financial planners anticipate that its free cash flow will grow at a constant rate of 6%. Also, the firm concluded that the new product caused the WACC to fall to 9%. The market value of TTC’s debt is $1,200 million; it uses no preferred stock; and there are 20 million shares of common stock outstanding. Use the corporate valuation model to value the stock.

9-18 NONCONSTANT GROWTH STOCK VALUATION Taussig Technologies Corporation (TTC) has been growing at a rate of 20% per year in recent years. This same growth rate is expected to last for another 2 years, then decline to gn =6%.

  1. a. If D0 = $1.60 and rs = 10%, what is TIC’s stock worth today? What are its expected dividend, and capital gains yields at this time, that is, during Year 1?
  2. b. Now assume that ITC’s period of supernormal growth is to last for 5 years rather than 2 years. Flow would this affect the price, dividend yield, and capital gains yield? Answer in words only.
  3. c. What will TTC’s dividend and capital gains yields be once its period of supernormal growth ends? (Hint: These values will be the same regardless of whether you examine the case of 2 or 5 years of supernormal growth; the calculations are very easy.)
  4. d. Explain why investors are interested in the changing relationship between dividend and capital gains yields over time.

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Chapter 9 Solutions

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