Kimberly-Clark, a household product manufacturer, reported earnings per sha 3.20 in 1993, and paid dividends per share of $1.70 in that year. The firm rep lepreciation of $315 million in 1993, and capital expenditures of $475 million. (' vere 160 million shares outstanding, trading at $51 per share.) This ratio of c xpenditures to depreciation is expected to be maintained in the long term. The wo apital needs are negligible. Kimberly-Clark had debt outstanding of $1.6 billior ntends to maintain its current financing mix (of debt and equity) to finance nvestment needs. Assume that the firm is in steady state, and earnings per lividends per share, and free cash flow to equity per share are all expected to gro year. The stock had a beta of 1.05. The treasury bond rate is 6.25% and the m

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
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Kimberly-Clark, a household product manufacturer, reported earnings per share of
$3.20 in 1993, and paid dividends per share of $1.70 in that year. The firm reported
depreciation of $315 million in 1993, and capital expenditures of $475 million. (There
were 160 million shares outstanding, trading at $51 per share.) This ratio of capital
expenditures to depreciation is expected to be maintained in the long term. The working
capital needs are negligible. Kimberly-Clark had debt outstanding of $1.6 billion, and
intends to maintain its current financing mix (of debt and equity) to finance future
investment needs. Assume that the firm is in steady state, and earnings per share,
dividends per share, and free cash flow to equity per share are all expected to grow 7%
a year. The stock had a beta of 1.05. The treasury bond rate is 6.25% and the market
risk premium is 5.50%.
A. Estimate the value per share, using the Dividend Discount Model.
B. Estimate the value per share, using the FCFE Model.
C. How would you explain the difference between the two models, and which one
would you use as your benchmark for comparison to the market price?
Transcribed Image Text:Kimberly-Clark, a household product manufacturer, reported earnings per share of $3.20 in 1993, and paid dividends per share of $1.70 in that year. The firm reported depreciation of $315 million in 1993, and capital expenditures of $475 million. (There were 160 million shares outstanding, trading at $51 per share.) This ratio of capital expenditures to depreciation is expected to be maintained in the long term. The working capital needs are negligible. Kimberly-Clark had debt outstanding of $1.6 billion, and intends to maintain its current financing mix (of debt and equity) to finance future investment needs. Assume that the firm is in steady state, and earnings per share, dividends per share, and free cash flow to equity per share are all expected to grow 7% a year. The stock had a beta of 1.05. The treasury bond rate is 6.25% and the market risk premium is 5.50%. A. Estimate the value per share, using the Dividend Discount Model. B. Estimate the value per share, using the FCFE Model. C. How would you explain the difference between the two models, and which one would you use as your benchmark for comparison to the market price?
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