3-1 Homework Stock Valuation Calculations Implications of Findings

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Jan 9, 2024

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3-1 Homework: Stock Valuation Calculations Implications of Findings Ayana Russell Southern New Hampshire University FIN 550 Corporate Finance Management Dr. Russell Bellemare December 24 th , 2023

Question 1: Turbo Technology Computers With Turbo Technology's earnings and dividends expected to grow over three years, my task is to calculate the dividend and capital gains yield for each year and the value of their stock today. Ehrhardt & Brigham (2019) defined dividend yield as either the end-of-capital dividend by the beginning-of-period price or as the ratio of the current dividend to the current price (p.814). Dividends paid in the D1 period were $1.3225, the D2 period was $1.5209, and the D3 period was $1.7186. For Turbo Technology Computers, year 1 saw about a 5.24% dividend yield, meaning that the investor was paid nearly 5.24% for each share the investor owned. In year two, the company reported a dividend yield of around 5.65% and 6.0% in the third year. Capital gains yield (CGY) is a metric expressed as a percentage that measures the growth in the value of an investment relative to its initial price. (Beck, 2023). The capital gains yield for Turbo Technology was 6.74 per cent in the first year, 6.35 per cent in the second, and 6.00 per cent in the third. Again, with dividends of about 6%, Turbo Technology Computers is a financially sound and appealing investment option. Over all three time periods, a yearly return of 12% was recorded. The term "stock" refers to the ownership certificates of any corporation (Economictimes.com). Turbo's current stock price is $25.23 per share. The stock price was determined by adding two components: the present value of the dividends during the supernormal growth period, which amounts to $3.62, and the current value of Turbo's stock price at the end of year 3, which is $21.61. At a present stock price of $25.23, Turbo Technology has financial stability and exhibits potential for growth in the upcoming three years. Question 2: Kassidy’s Kabob House According to Ehrhardt & Brigham (2019), the required rate of return occurs when providers expect more cash back in the future than they originally supplied to users. In other

words, providers expect a positive rate of return on their investment (p.18). Investors have less uncertainty and more stability in the market when demand and supply are in equilibrium, which is an assumption the problem makes. According to the data provided, a 10% rate of return is necessary for the company's shares. Based on the provided information, Kassidy's Kabob House may be regarded as a favourable investment with a 10% return rate, which is within the typical range for stock investments. Question 3: McCaffrey’s Inc. At McCaffrey's Inc., we were tasked with determining the operational value, overall value, projected common equity value, and estimated company's per-share stock price. Based on the data, the company's equity is at $2,000,000, while its overall value amounts to $3,000,000. The debt is assessed at a valuation of $1,000,000. Investors can be reassured by the fact that McCaffrey's Inc. possesses a robust financial position, as seen by the company's ability to retain $2,000,000 in assets even after settling all outstanding debts. According to the provided information, McCaffery's Inc. has 50,000 shares of stock outstanding. The projected price per share is $40.

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References Ehrhardt, M. C., & Brigham, E. F. (2019). Corporate Finance: A Focused Approach (7th ed.). Cengage Learning US. https://mbsdirect.vitalsource.com/books/9781337910231 Beck, R. H. (2023, January 9). What is capital gains yield ?SmartAsset. https://smartasset.com/investing/what-is-capital-gains-yield What is stocks? definition of stocks, stocks meaning . The Economic Times. (n.d.). https://economictimes.indiatimes.com/definition/stocks