FINANCE-Financial Management Excel Project.

FINANCE-Financial Management Excel Project.

Question # 00134849 Posted By: solutionshere Updated on: 11/16/2015 01:09 PM Due on: 12/16/2015
Subject Business Topic General Business Tutorials:
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Chapter 9. Comprehensive/Spreadsheet problem
Taussig Technologies Corporation (TTC) has been growing at a rate of 20% per year in recent years. This
same growth rate is expected to last for another 2 years, then to decline to gn = 6%.
a. If D0 = $1.60 and rs = 10%,what is TTC's stock worth today? What are its expected dividend
and capital gains yields at this time, that is, during Year 1?
1. Find the price today.
D0 $1.60
rs 10.0%
gs 20% Short-run g; for Years 1-2 only.
gn 6% Long-run g; for Year 3 and all following years.
20%
6%
Year 0 1 2 3
Dividend $1.6000
PV of dividends
= Horizon value = P2 =
= rs - gn
= P0
2. Find the expected dividend yield.
Recall that the expected dividend yield is equal to the next expected annual dividend divided by the price at
the beginning of the period.
Dividend yield = D1 / P0
Dividend yield = /
Dividend yield =
3. Find the expected capital gains yield.
The capital gains yield can be calculated by simply subtracting the dividend yield from the expected
total return.
Cap. gain yield = Expected total return − Dividend yield
Cap. gain yield = 10.0% −
Cap. gain yield =
b. Now assume that TTC's period of supernormal growth is to last for 5 years rather than 2 years.
How would this affect the price, dividend yield, and capital gains yield?
1. Find the price today.
D0 $1.60
rs 10.0%
gs 20% Short-run g; for Years 1-5 only.
gn 6% Long-run g; for Year 6 and all following years.
20%
6%
Year 0 1 2 3 4 5 6
Dividend $1.6000
PV of dividends
= Horizon value = P5 =
= P0 = rs − gn
Part 2. Find the expected dividend yield.
Dividend yield = D1 / P0
Dividend yield = /
Dividend yield =
Part 3. Find the expected capital gains yield.
Cap. gain yield = Expected total return - Dividend yield
Cap. gain yield = 10.0% -
Cap. gain yield =
d. TTC recently introduced a new line of products that has been wildly successful. On the basis of this
success and anticipated future success, the following free cash flows were projected:
Year FCF (in millions)
1 $5.5
2 $12.1
3 $23.8
4 $44.1
5 $69.0
6 $88.8
7 $107.5
8 $128.9
9 $147.1
10 $161.3
After the 10th year, TTC's financial planners anticipate that its free cash flow will grow at a constant rate
of 6%. Also, the firm concluded that the new product caused the WACC to fall to 9%. The market value
of TTC's debt is $1,200 million, it uses no preferred stock, and there are 20 million shares of common
stock outstanding. Use the corporate valuation model approach to value the stock.
INPUT DATA: (Dollars in Millions)
WACC 9%
gn 6%
Millions of shares 20
MV of debt $1,200
Year
0 1 2 3 4 5 6 7 8 9 10 11
FCF's $5.5 $12.1 $23.8 $44.1 $69.0 $88.8 $107.5 $128.9 $147.1 $161.3
PV of FCF's
PV of FCF1-10 =
HV at Year 10 of FCF after Year 10 = FCF11/(WACC– gn):
PV of HV at Year 0 = HV/(1+WACC)10:
Sum = Value of the Total Corporation
Less: MV of Debt and Preferred
Value of Common Equity
Number of Shares (in Millions) to Divide By:
Value per Share = Value of Common Equity/No. Shares: versus using the discounted
dividend model
The price as estimated by the corporate valuation method differs from the discounted dividends method because
different assumptions are built into the two situations. If we had projected financial statements, found both
dividends and free cash flow from those projected statements, and applied the two methods, then the
prices produced would have been identical. As it stands, though, the two prices were based on somewhat
different assumptions, hence different prices were obtained. Note especially that in the FCF model we
assumed a WACC of 9% versus a cost of equity of 10% for the discounted dividend model. That would obviously tend to
raise the price.
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    Tutorial # 00129344 Posted By: solutionshere Posted on: 11/16/2015 01:09 PM
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