1. Scotto Manufacturing is a mature firm in the machine tool component industry. The firm's most recent common stock dividend was $3.25 per share. Because of its maturity as well as its stable sales and earnings, the firm's management feels that dividends will remain at the current level for the foreseeable future.
a. If the required return is 13%, what will be the value of Scotto's common stock?
b. If the firm's risk as perceived by market participants suddenly increase, causing the required return to rise to 18%, what will be the common stock value?
c. Judging on the basis of your findings in parts a and b, what impact does risk have on value? Explain.
2. Kelsey Drums, Inc., is a well-established supplier of fine percussion instruments to orchestras all over the United States. The company's class A common stock has paid a dividend of $5.00 per share per year for the last 25 years. Management expects to continue to pay at that amount for the foreseeable future. Sally Talbot purchased 100 shares of Kelsey class A common 10 years ago at a time when the required rate of return for the stock was 12%. She wants to sell her share today. The current required rate of return for the stock is 15%. How much capital gain or loss will Sally have on her shares?
3. Use the constant-growth model (Gordon growth model) to find the value of each firm shown in the following table.
|
Firm
|
Dividend expected next year
|
Dividend growth rate
|
Required return
|
|
A
|
$4.30
|
6%
|
10%
|
|
B
|
$3.00
|
5
|
15
|
|
C
|
$0.85
|
10
|
16
|
|
D
|
$9.00
|
6
|
9
|
4. Home Place Hotels, Inc., is entering into a 3-year remodeling and expansion project. The construction will have a limiting effect on earning during that time, but when it is complete, it should allow the company to enjoy much improved growth in earnings and dividends. Last year, the company paid a dividend of $4.10. It expected zero growth in the next year. In year 2 and 3, 5% growth is expected, and in year 4, 12% growth. In year 5 and thereafter, growth should be a constant 7% per year. What is the maximum price per share that an investor who requires a return of 16% should pay for Home Place Hotels common stock?
5. Nabor Industries is considering going public but is unsure of a fair offering price for the company. Before hiring an investment banker to assist in making the public offering, managers at Nabor have decided to make their own estimate of the firm's common stock value. The firm's CFO has gathered data for performing the valuating using the free cash flow valuation model.
The firm's weighted average cost of capital is 12%, and it has $2,500,000 of debt at market value and $400,000 of preferred stock at its assumed market value. The estimated free cash flows over the next 5 year, 2013 through 2017, are given below. Beyond 2017 to infinity, the firm expects its free cash flow to grow by 4% annually.
|
Year(t)
|
Free cash flow(FCF)
|
|
2013
|
$100,000
|
|
2014
|
225,000
|
|
2015
|
410,000
|
|
2016
|
450,000
|
|
2017
|
490,000
|
a. Estimate the value of Nabor Industries' entire company by using the free cash flow valuation model.
b. Use your finding in part a, along with the data provided above, to find Nabor Industries' common stock value.
c. If the firm plans to issue 300,000 shares of common stock, what is its estimated value per share?
6. Giant Enterprises' stock has a required return of 12.7%. The company, which plans to pay a dividend of $2.60 per share in the coming year, anticipates that its future dividends will increase at an annual rate consistent with that experienced over the 2009-2015 period, when the following dividends were paid:
|
Year
|
Div per Shr
|
|
2010
|
$1.95
|
|
2011
|
$1.80
|
|
2012
|
$1.82
|
|
2013
|
$1.95
|
|
2014
|
$2.10
|
|
2015
|
$2.28
|
|
2016
|
$2.85
|
a. If the risk-free rate is 5%, what is the risk premium on Giant's stock?
b. Using the constant-growth model, estimate the value of Giant's stock.
c. Explain what effect, if any, a decrease in the risk premium would have on the value of Giant's stock.
7. What is the value of the following call option according to the Black Scholes Option Pricing Model?
Stock Price = $55.00
Strike Price = $60.00
Time to Expiration = 9 Months = 0.75 years.
Risk-Free Rate = 5.0%.
Stock Return Standard Deviation = 0.49.
8. What impact does each of the following call option parameters have on the value of a call option?
1. Current Stock Price
2. Strike Price
3. Option's Term to Maturity
4. Risk-Free Rate
5. Variability of The Stock Price