FIN550_III-I_homework_stock_valuation_calculations

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Running head: STOCK VALUATION CALCULATIONS 1 III-I Homework: Stock Valuation Cg Shannon D. Burns FIN 550: Corporate Financial Management Southern University of New Hampshire December 2, 2020

FIN550 – III-I Homework: Stock Valuation Calculations 2 Question I Turbo Technology Computers is experiencing a period of rapid growth. Earnings and dividends are expected to grow at a rate of 15% during the next two years, at 13% in the third year, and at a constant rate of 6% thereafter. Turbo's last dividend was $1.15, and the required rate of return on the stock is 12%. Complete the following calculations: a. Calculate the value of the stock today. b. Calculate P1^ and P2^. c. Calculate the dividend yield and capital gains yield for Years 1, 2, and 3. To determine the current value of Turbo Technology Computers stock, the annual dividends that are expected in the non-constant growth period will first need to be forecasted for each year of non-constant growth, stopping at the first year at which dividends grow at a constant rate. (Ehrhardt & Brigham, 2017; p. 321) Next, we take the forecasted dividends and discount them to find their PV. (Ehrhardt & Brigham, 2017; p. 321) In years 1 and 2, the dividend grows 15% while year 3, the dividend grows by 13% annually. As a result, the annual forecasted dividends for years 1, 2, and 3 are $1.3225 and $1.5209 and 1.7186, respectively. Now that these amounts are derived, we find the present value of the dividends. The required rate of return ( r s ) is 12% and inputting the terms into the formula below yields as $3.62 PV of the dividends. Value of stock = ¿ ¿¿ The company’s growth rate returns to a constant 6% a year after the third year. Therefore, in part two of question 1 we first solve for P3^ (“P hat 3”) and then find the Present value of

FIN550 – III-I Homework: Stock Valuation Calculations 3 that amount. P3^ is the expected price of the stock at the end of year 3. Using the formula provided in part 2, we determine that the expected price of the stock at the end of year 3 to be $30.36. Discounting back to today reveals that the PV of P3^ = $21.61. Once the PV of P3^ is determined and the PV of the dividends, the current value of the stock can be determined. This is done by taking the summation of the PV of the dividends ($3.62) and the PV of P3^ ($21.61). Thus, the current value of the stock is $25.23. For part B, finding the expected price of the stock at the end of Year 1 (P1^) and Year 2 (P2^) is done by finding the current value of the company’s stock (P0) by adding the present value of future dividends with the expected price of the stock at year 3. Using the number that were generated in part A of the question the formula input goes as followed P1^ = $26.93 and P2^=$28.64. For part C we must calculate the dividend yield and capital gains yield for each year. The dividend yield is determined by dividing the current annual dividend by the price of the stock. The capital gains yield is determined by dividend the capital gain by the beginning price. The total return is the dividend yield and capital gains yield in each year added together. Turbo Technology Computers meets the required rate of return of 12% during all three years of growth and, therefore shows financial assurance. Question II. Kassidy’s Kabob House wants to determine the stock’s required rate of return. This is found by dividend the dividend payment by the price of preferred share or $5, and the market price of the preferred stock, $50 per share. The formula for the required rate of return is ( r ps ) =( dividend ) ÷ ( market price ) . The required rate of return is 10%. Question III.

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FIN550 – III-I Homework: Stock Valuation Calculations 4 In finding the value of operations, the total value of the company, the estimated value of common equity, and the estimate per-share stock price of McCaffrey’s Inc. we can the following formula. Vop = FCF ( 1 + g ) WACC − g Using the formal and can determine that McCaffrey’s value of operation is $2,675,000. Adding the sum value of operations with the sum value of the company’s non-operating assets give us McCaffrey’s total value which $3 million. The Value of Equity is determined by removing the sum representing the company’s debt that equals $1 million. This leaves us with a sum value of equity equaling $2 million. To determine the estimated per-share stock price, divided the total value of equity by the number of shares outstanding. McCaffrey’s has 50,000 shares of stock outstanding, Therefore the estimated per share price is $2 million divided by 50,000 shares, or $40 per share. References Ehrhart & Brigham (2017). Stock and Options. In, Corporate Finance. A Focused Approach (8 th Ed.) Boston, MA, United States: Cengage Learning.