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 reporteddepreciation of $315 million in 1993, and capital expenditures of $475 million. (Therewere 160 million shares outstanding, trading at $51 per share.) This ratio of capitalexpenditures to depreciation is expected to be maintained in the long term. The workingcapital needs are negligible. Kimberly-Clark had debt outstanding of $1.6 billion, andintends to maintain its current financing mix (of debt and equity) to finance futureinvestment 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 marketrisk 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 onewould you use as your benchmark for comparison to the market price?

Dividend discount model is used in the valuation of equity based on the required rate of dividend…

Answered: Kimberly-Clark, a household product…

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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Lauryn’s Doll Co. had EBIT last year of $47 million, which is net of a depreciation expense of $4.7 million. In addition, Lauryn’s made $7.25 million in capital expenditures and increased net working capital by $2.8 million. Assume that Lauryn’s has a reported equity beta of 1.5, a debt-to-equity ratio of .5, and a tax rate of 21 percent. What is Lauryn’s FCF for the year?(Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)
Lauryn's Doll Company had EBIT last year of $58 million, which is net of a depreciation expense of $5.8 million. In addition, Lauryn's made $6.3 million in capital expenditures and increased net working capital by $2.5 million. Assume that Lauryn's has a reported equity beta of 1.9, a debt-to-equity ratio of 0.6, and a tax rate of 21 percent. What is Lauryn's FCF for the year? Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. FCF million
NoGrowth Incorporated had operating income before interest and taxes in 2002 of $220 million. The firm was expected to generate this level of operating income indefinitely. The firm had depreciation expenses of $10 million that same year. Capital spending totaled $20 million during 2002. At the end of 2001 and 2002, net working capital totaled $70 million and $80 million. The firm’s combined marginal state, local, and federal tax rate was 40%, and its outstanding debt had a market value of $1.2 billion. The 10-year Treasury bond rate is 5%, and the borrowing rate for companies exhibiting levels of creditworthiness similar to NoGrowth is 7%. The historical risk premium for stocks over the risk-free rate of return is 5.5%. NoGrowth’s beta was estimated to be 1.0. The firm had 2.5 million shares of common stock outstanding at the end of 2002. NoGrowth’s target debt to total capital ratio is 30%. Estimate NoGrowth’s value per share at the end of 2002.
You have looked at the current financial statements for Reigle Homes, Co. The company has an EBIT of $2,850,000 this year. Depreciation, the increase in net working capital, and capital spending were $225,000, $90,000, and $415,000, respectively. You expect that over the next five years, EBIT will grow at 16 percent per year, depreciation and capital spending will grow at 21 percent per year, and NWC will grow at 11 percent per year. The company has $15,100,000 in debt and 345,000 shares outstanding. You believe that sales in five years will be $22,600,000 and the price-sales ratio will be 2.4. The company’s WACC is 8.5 percent and the tax rate is 21 percent. What is the price per share of the company's stock?
You have looked at the current financial statements for J&R Homes, Company. The company has an EBIT of $2,890,000 this year. Depreciation, the increase in net working capital, and capital spending were $227,000, $92,000, and $425,000, respectively. You expect that over the next five years, EBIT will grow at 18 percent per year, depreciation and capital spending will grow at 23 percent per year, and NWC will grow at 13 percent per year. The company currently has $15.5 million in debt and 415,000 shares outstanding. After Year 5, the adjusted cash flow from assets is expected to grow at 3.5 percent indefinitely. The company's WACC is 8.9 percent and the tax rate is 23 percent. What is the price per share of the company's stock? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Share price
In the previous problem, suppose you believe that sales in five years will be $45.5 million and the price-sales ratio will be 2.15. What is the share price now? Previous problem You have looked at the current financial statements for J&R Homes, Co. The company has an EBIT of $3.35 million this year. Depreciation, the increase in net working capital, and capital spending were $295,000, $125,000, and $535,000, respectively. You expect that over the next five years, EBIT will grow at 15 percent per year, depreciation and capital spending will grow at 20 percent per year, and NWC will grow at 10 percent per year. The company has $19.5 million in debt and 400,000 shares outstanding. After Year 5, the adjusted cash flow from assets is expected to grow at 3.5 percent indefinitely. The company’s WACC is 8.6 percent, and the tax rate is 22 percent. What is the price per share of the company’s stock?
Standard, Inc. reported EBIT of $57.00 million for last year. Depreciation expense totaled $20 million and capital expenditures came to $7 million. The company increased net working capital by $2 million. Free cash flow is expected to grow at a rate of 5.30% for the foreseeable future. Standard faces a 40% tax rate and has a 0.40 debt to equity ratio with $200 million (market value) in debt outstanding. Standard's equity beta is 1.24, the risk-free rate is currently 5% and the market risk premium is estimated to be 6%. What is the current value (in millions) of Standard's equity?
The Anderson Corporation (an all-equity-financed firm) has a sales level of $300,000 with a 12 percent profit margin before interest and taxes. To generate this sales volume, the firm maintains a fixed-asset investment of $150,000. Currently, the firm maintains $50,000 in current assets. a) Determine the total asset turnover for the firm and compute the rate of return on total assets before taxes. b) Compute the before-tax rate of return on assets at different levels of current assets starting with $10,000 and increasing in $15,000 increments to $100,000. c) If the new current assets were financed with long-term debt at 15 percent interest, what would be the before-tax interest "cost" if the new current assets added equals $40,000?
You have looked at the current financial statements for J&R Homes, Company. The company has an EBIT of $3.35 million this year. Depreciation, the increase in net working capital, and capital spending were $295,000, $125,000, and $535,000, respectively. You expect that over the next five years, EBIT will grow at 15 percent per year, depreciation and capital spending will grow at 20 percent per year, and NWC will grow at 10 percent per year. The company has $19.5 million in debt and 400,000 shares outstanding. You believe that sales in Year 5 will be $45.5 million and the price-sales ratio will be 2.15. The company’s WACC is 8.6 percent and the tax rate is 22 percent. What is the price per share of the company's stock?
You have looked at the current financial statements for J&R Homes, Company. The company has an EBIT of $4,050,000 this year. Depreciation, the increase in net working capital, and capital spending were $285,000, $139,000, and $535,000, respectively. You expect that over the next five years, EBIT will grow at 15 percent per year, depreciation and capital spending will grow at 20 per year, and NWC will grow at 10 per year. The company has $23,500,000 in debt and 440,000 shares outstanding. After Year 5, the adjusted cash flow from assets is expected to grow at 3.4 percent, indefinitely. The company's WACC is 9.45 percent and the tax rate is 23 percent. What is the price per share of the company's stock? D Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. Share price
Petal Providers Corporation, described in Problem 1, is interested in estimating its sustainable sales growth rate. Last year revenues were $1 million, the net profit was $50,000, the investment in assets was $750,000, payables and accruals were $100,000, and equity at the end of the year was $450,000 (i.e., beginning of year equity of $400,000 plus retained profits of $50,000). The venture did not pay out any dividends and does not expect to pay dividends for the foreseeable future. A. Estimate the sustainable sales growth rate for Petal Providers based on the information provided in this problem. B. How would your answer in Part A change if economic growth is average and Petal Providers’ net profit margin is 7 percent?
You have been asked to value Brilliant Enterprises, a publicly traded IT services firm, and have collected the following information: After-tax operating income last year = $100 million Net income last year = $82.5 million Book value of equity at start of this year = $750 million Book value of debt at start of this year = $250 million Capital expenditure last year = $80 million Depreciation last year = $30 million Increase in non-cash working capital last year = $10 million a) Assuming that Brilliant Enterprises will maintain its return on capital and reinvestment rate from last year for the next 3 years, estimate the free cash flow for the company for each of the next 3 years. b) After year 3, Brilliant expects its growth rate to decline to 3% and the return on capital to be 9% in perpetuity. Assuming that its cost of capital is 8%, estimate the terminal value at the end of the third year. c) Assuming that Brilliant has a cost of capital of 10% for the next 3…

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