Ace Co. is to be taken over by Beta Ltd. at the end of year 2007. Beta agrees to pay the share-holders of Ace the book value per share at the time of the takeover. A reliable analyst makes the following projections for Ace (assume cost of capital is 10% per annum): (S per share) 20022003 2004 2005 2006 2007 Dividends Operating cash flows. Capital expenditures. Debt increase decrease). Net income Book value $1.00 S1.00 S1.00S1.00S1.00 2.00| 1.50 1.0이 0.75| 0.50| 1.00 1.00 |(1.000.50| 1.0이 1.25| 0.50| 1.45 1.10 0.60 0.25 (0.10) 9.00 9.45 9.55 9.15 8.40 7.30 Required: a. Estimate Ace Co.'s value per share at the end of year 2002 using the dividend discount model. b. Estimate Ace Co.'s value per share at the end of year 2002 using the residual income model. C. Attempt to estimate the value of Ace Co. at the end of year 2002 using the free cash flow to equity model.
Ace Co. is to be taken over by Beta Ltd. at the end of year 2007. Beta agrees to pay the share-holders of Ace the book value per share at the time of the takeover. A reliable analyst makes the following projections for Ace (assume cost of capital is 10% per annum): (S per share) 20022003 2004 2005 2006 2007 Dividends Operating cash flows. Capital expenditures. Debt increase decrease). Net income Book value $1.00 S1.00 S1.00S1.00S1.00 2.00| 1.50 1.0이 0.75| 0.50| 1.00 1.00 |(1.000.50| 1.0이 1.25| 0.50| 1.45 1.10 0.60 0.25 (0.10) 9.00 9.45 9.55 9.15 8.40 7.30 Required: a. Estimate Ace Co.'s value per share at the end of year 2002 using the dividend discount model. b. Estimate Ace Co.'s value per share at the end of year 2002 using the residual income model. C. Attempt to estimate the value of Ace Co. at the end of year 2002 using the free cash flow to equity model.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Ace Co. is to be taken over by Beta Ltd. at the end of year 2007. Beta agrees to pay the share-holders of Ace the book value per share at the time of the takeover. A reliable analyst makes the following projections for Ace (assume cost of capital is 10% per annum): (S per share) |2002/2003[2004|2005(20062007| Dividends 151.00[51.00/51.00[51.00[51.00) perating cash 2.00[ 1.50] 1.00] 0.75[ 0.50] lows.......... (Capital —{ — 100 Loo| — lexpenditures.. [Debt increase .oojf0.50] 1.00| 1.25 0.50] (decrease).... INet income 145 1.10| 0.60] 0.25[(0.10)| Book value 9.00| 9.45 9.55 9.15 8.40| 7.30 Required: a. Estimate Ace Co’s value per share at the end of year 2002 using the dividend discount model . b. Estimate Ace Co’s value per share at the end of year 2002 using the residual income model.
Transcribed Image Text:Ace Co. is to be taken over by Beta Ltd. at the end of year 2007. Beta agrees to pay the share-holders
of Ace the book value per share at the time of the takeover. A reliable analyst makes the following
projections for Ace (assume cost of capital is 10% per annum):
(S per share) 2002 2003 20042005 2006 2007
Dividends
Operating cash
flows..
Capital
expenditures.
Debt increase
(decrease).
Net income
Book value
$1.00 S1.00S1.00S1.00 S1.00
2.00 1.50 1.o0 0.75 0.50
|
1.00 1.00
(1.00) (0.50) 1.00 1.25 0.50
1.45 1.10 0.60 0.25 (0.10)
9.00 9.45 9.55 9.15 8.40 7.30
Required:
a. Estimate Ace Co's value per share at the end of year 2002 using the dividend discount model.
b. Estimate Ace Co's value per share at the end of year 2002 using the residual income model.
C. Attempt to estimate the value of Ace Co. at the end of year 2002 using the free cash flow to equity
model.
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