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Constant Growth Models 1. ABC Corporation is currently paying $2 in dividends. Its earnings are expected to grow at a constant rate of 12% for the foreseeable future. If investors require 15% return compute the intrinsic value of ABC stock. 2. XYZ Company is expecting its return on equity to equal 25% and expects to pay 40% of profits as dividends. Its current dividends are $2.00, and the investors require an 18% return. a) What is XYZ’s expected growth rate? b) What is XYZ’s intrinsic value? c) If its market price is $73.50, would you invest in XYZ stock? Explain 3. Valuation Ratios Assume the following financial data: Short-term assets $200,000 Long-term assets 350,000 ————- Total assets $550,000 Short-term debt $100,000 Long-term debt 50,000 ————– Total liabilities $150,000 Common stock $150,000 Retained earnings 250,000 ————— Total liabilities and stock holders’ equity $550,000 Total earnings (after-tax) $48,000 Dividends per share $1.10 Stock price $54 Shares outstanding 16,000 a. Compute the P/E ratio (stock price to earnings per share) b. Compute the ratio of stock price to book value per share. (note that book value equals stockholders’ equity) c. Compute the dividend yield d. Compute the payout ratio 4. Price Ratio etc. Analysis: Given the information below for Seger Corporation, compute the estimated share price in 2012 using various price ratio analyses: Year 2008 2009 2010 2011 2012 2013 Price $94.50 100.40 99.10 97.90 121.50 EPS 4.34 5.05 5.22 6.06 7.00 8.00 CFPS 7.27 8.24 8.71 10.12 11.80 13.10 SPS 52.60 58.52 57.90 60.69 71.60 78.70 EPS – Earnings Per Share CFPS – Cash Flow Per Share SPS – Sales Per Share Hint: Please use the 5-year average for each ratio to estimate the Price in 2012 using the 3 approaches. EPS, P/E & OTHER RATIOS 5. The Amherst Company has net profits of $10 million, sales of $150 million, and 2.5 million shares outstanding. The company has total assets of $75 million and total stockholders’ equity of $45 million. It pays $1 per share in common dividends, and the stock trades at $20 per share. Given the information, please determine: a. Amherst’s EPS b. Its book value per share and price-to-book ratio c. The firm’s P/E ratio d. Its net profit margin e. The stock’s dividend payout ratio and dividend yield f. The stock’s PEG ratio, given that the company’s earnings have been growing at an average annual rate of 7.5% 6. Find the EPS, P/E ratio and dividend yield of a company that has 5 million shares of common stock outstanding (the shares trade in the market at $25 per share), earns 10% after taxes on annual sales of $150 million, and has a dividend payout ratio of 35%. At what rate the company’s net earnings have to be growing for a PEG ratio of 2.0? DU-PONT ANALYSIS: 7. A. XYZ stock Corp. has a net profit margin of 8% and total asset turnover of 2 times, what is its ROA or ROI? B. In part A. above, if the total assets amount to $1 billion and total equity is $500 million, compute the ROE. MULTI-STAGE OR VARIABLE GROWTH RATE MODEL: 8. Oasis Electronics has just been raised to a strong buy at one of the major brokerage firms. This year, Oasis paid an annual dividend of $3 per share. Its dividends are expected to grow at 12% for the next 2 years, 10% in year 3 and to level off at 9% per year after that. Further, the stock has a beta of 1.8, risk-free rate is 6%, and the expected return on the market is 11%. Using the CAPM to find the Required Rate of Return (ROR), and put a value on this stock. 9. You invested in a no-load mutual fund 1 year ago by purchasing 1,000 shares at a NAV of $25 per share. The fund distributed dividends of $1.50 and capital gains of $2. If the current NAV is $26, calculate the HPR.

Constant Growth Models

1. ABC Corporation is currently paying $2 in dividends. Its earnings are expected to grow at a constant rate of 12% for the foreseeable future. If investors require 15% return compute the intrinsic value of ABC stock.

2. XYZ Company is expecting its return on equity to equal 25% and expects to pay 40% of profits as dividends. Its current dividends are $2.00, and the investors require an 18% return.

a) What is XYZ’s expected growth rate?

b) What is XYZ’s intrinsic value?

c) If its market price is $73.50, would you invest in XYZ stock? Explain

3. Valuation Ratios

Assume the following financial data:

Short-term assets $200,000
Long-term assets 350,000
————-
Total assets $550,000

Short-term debt $100,000
Long-term debt 50,000
————–
Total liabilities $150,000

Common stock $150,000
Retained earnings 250,000
—————
Total liabilities and stock holders’ equity $550,000

Total earnings (after-tax) $48,000
Dividends per share $1.10
Stock price $54
Shares outstanding 16,000

a. Compute the P/E ratio (stock price to earnings per share)
b. Compute the ratio of stock price to book value per share. (note that book value equals stockholders’ equity)
c. Compute the dividend yield
d. Compute the payout ratio

4. Price Ratio etc. Analysis:

Given the information below for Seger Corporation, compute the estimated share price in 2012 using various price ratio analyses:

Year 2008 2009 2010 2011 2012 2013

Price $94.50 100.40 99.10 97.90 121.50

EPS 4.34 5.05 5.22 6.06 7.00 8.00

CFPS 7.27 8.24 8.71 10.12 11.80 13.10

SPS 52.60 58.52 57.90 60.69 71.60 78.70

EPS – Earnings Per Share
CFPS – Cash Flow Per Share
SPS – Sales Per Share

Hint: Please use the 5-year average for each ratio to estimate the Price in 2012 using the 3 approaches.

EPS, P/E & OTHER RATIOS

5. The Amherst Company has net profits of $10 million, sales of $150 million, and 2.5 million shares outstanding. The company has total assets of $75 million and total stockholders’ equity of $45 million. It pays $1 per share in common dividends, and the stock trades at $20 per share. Given the information, please determine:

a. Amherst’s EPS
b. Its book value per share and price-to-book ratio
c. The firm’s P/E ratio
d. Its net profit margin
e. The stock’s dividend payout ratio and dividend yield
f. The stock’s PEG ratio, given that the company’s earnings have been growing at an average annual rate of 7.5%

6. Find the EPS, P/E ratio and dividend yield of a company that has 5 million shares of common stock outstanding (the shares trade in the market at $25 per share), earns 10% after taxes on annual sales of $150 million, and has a dividend payout ratio of 35%. At what rate the company’s net earnings have to be growing for a PEG ratio of 2.0?

DU-PONT ANALYSIS:

7. A. XYZ stock Corp. has a net profit margin of 8% and total asset turnover of 2 times, what is its ROA or ROI?

B. In part A. above, if the total assets amount to $1 billion and total equity is $500 million, compute the ROE.

MULTI-STAGE OR VARIABLE GROWTH RATE MODEL:

8. Oasis Electronics has just been raised to a strong buy at one of the major brokerage firms. This year, Oasis paid an annual dividend of $3 per share. Its dividends are expected to grow at 12% for the next 2 years, 10% in year 3 and to level off at 9% per year after that. Further, the stock has a beta of 1.8, risk-free rate is 6%, and the expected return on the market is 11%. Using the CAPM to find the Required Rate of Return (ROR), and put a value on this stock.

9. You invested in a no-load mutual fund 1 year ago by purchasing 1,000 shares at a NAV of $25 per share. The fund distributed dividends of $1.50 and capital gains of $2. If the current NAV is $26, calculate the HPR.

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