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Question # 00092752 Posted By: solutionshere Updated on: 08/15/2015 12:56 PM Due on: 09/14/2015
Subject Finance Topic Finance Tutorials:
Question
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Name: &lt;your Name&gt;
Instructions
Show work by embedding the algebra in the answer cell(s) and any intermediate steps in the calculations.
Leave all answers to 2-decimal places.

Q1.

Company A has projected net income per share for this year at $2.00 per share. It has
traditionally paid out a dividend of 30% of its net income. Income and dividends have been
growing at a rate of 5% per year. The equity discount rate for comparable companies is
10%. 2015 Spring2

a) What is the projected dividend for next year?
D1 =
b) What is the current value of the stock using the Constant Growth Model of the
Dividend Discount Model?
P0 =
Q2.

If from Question 1, having that projected EPS of $2.00, Company A decides to reduce its
dividend rate to 25%, and expects that the growth rate will increase as a result of the higher
retained earnings to 8% per year:

a) What is the new projected dividend for next year?
D1new =
b) What is the new stock value?
P0new =

Q3. A separate company, Company B, has a ROE of 12%.
a) What will be its estimated growth rate if it has a dividend payout ratio of 45%?
g=
b) If the company decreases the dividend payout ratio to 35%, what will be the new estimated
growth rate?
gnew =

Q4.

A separate third company, Company C, will have earnings per share of $4.00 this year. It
pays a dividend equal to 40% of net income. It is expecting that income and dividends will
grow by 25% next year and 20% the year after. In subsequent years, it is expecting to
return to its historical growth rate of 10% per year. The relevant discount rate is 15%.

a) What are the projected level of dividends for years 1, 2 and 3.
D1 =
D2 =
D3 =
b) What is the value of the stock in year 2?
P2 =
c) What is the value of the stock today? [assume dividend D0 has been paid out].
P0 =

Q5.

Company D has EBITDA of $400 million. It has outstanding debt of $700 million. Its industry
has typically displayed a Value/EBITDA ratio of between 6x and 8x EBITDA. If Company D
has 100 million shares outstanding, what is the estimate of the per share value of this
company?

Value/EBITDA ratio:

Low-end
6

Per Share Value:
Average Per Share Value =

High-end
8

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Tutorials for this Question
  1. Tutorial # 00087157 Posted By: solutionshere Posted on: 08/15/2015 12:56 PM
    Puchased By: 2
    Tutorial Preview
    will have earnings per share of $4.00 this year. Itpays a ...
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    soln-new.zip (216.76 KB)

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