Financial Concepts - Equity Pricing Exercise

Q1. Company A has projected net income per share for this year at $3.80 per share. It has traditionally paid out a dividend of 45% of its net income. Income and dividends have been growing at a rate of 8% per year. The equity discount rate for comparable companies is 13%.

a. What is the projected dividend for next year?

b. What is the current value of the stock using the Dividend Discount Model?

Q2. Company A decides to reduce its dividend rate to 40%, and expects that the growth rate will increase as a result of the higher retained earnings to 9% per year.

a. What is the new projected dividend for next year?

b. What is the new stock value?

Q3. Company B has a ROE of 18%.

a. What will be its estimated growth rate if it has a dividend payout ratio of 60%?

b. If the company decreases the dividend payout ratio to 50%, what will be the new estimated growth rate?

Q4. Company C will have earnings per share of $5.00 this year. It pays a dividend equal to 35% of net income. It is expecting that income and dividends will grow by 25% next year and 20% the year after. Then it is expecting to return to its historical growth rate of 8% per year. The relevant discount rate is 15%

a. What are the projected level of dividends for in years 1, 2 and 3

i. D₁ =

ii. D₂ =

iii. D₃ =

b. What is the value of the stock in year 2?

c. What is the value of the stock today?

Q5. Company D has EBITDA of $370 million. It has outstanding debt of $670 million. It is industry has typically displayed a Value /EBITDA ratio of between 5x and 6x EBITDA. If Company D has 20 million shares outstanding, what is the estimate of the per share value of the company?