Financial Planning Problems
916. Maynard Steel plans to pay a dividend of $3 this year. The company has an expected earnings growth rate of 4% per year and an equity cost of capital of 10%.
a. Assuming Maynard’s dividend payout rate and expected growth rate remains constant, and Maynard does not issue or repurchase shares, estimate Maynard’s share price.
b. Suppose Maynard decides to pay a dividend of $1 this year and use the remaining $2 per share to repurchase shares. If Maynard’s total payout rate remains constant, estimate Maynard’s share price.
c. If Maynard maintains the dividend and total payout rate given in part (b), at what rate are Maynard’s dividends and earnings per share expected to grow?
917. Benchmark Metrics, Inc. (BMI), an allequity financed firm, just reported EPS of $5.00 per share for 2008. Despite the economic downturn, BMI is confident regarding its current investment opportunities. But due to the financial crisis, BMI does not wish to fund these investments externally. The Board has therefore decided to suspend its stock repurchase plan and cut its dividend to $1 per share (vs. almost $2 per share in 2007), and retain these funds instead. The firm has just paid the 2008 dividend, and BMI plans to keep its dividend at $1 per share in 2009 as well. In subsequent years, it expects its growth opportunities to slow, and it will still be able to fund its growth internally with a target 40% dividend payout ratio, and reinitiating its stock repurchase plan for a total payout rate of 60%. (All dividends and repurchases occur at the end of each year.)
Suppose BMI’s existing operations will continue to generate the current level of earnings per share in the future. Assume further that the return on new investment is 15%, and that reinvestments will account for all future earnings growth (if any). Finally, assume BMI’s equity cost of capital is 10%.
a. Estimate BMI’s EPS in 2009 and 2010 (before any share repurchases).
b. What is the value of a share of BMI at the start of 2009?
918. Heavy Metal Corporation is expected to generate the following free cash flows over the next five years:
After then, the free cash flows are expected to grow at the industry average of 4% per year. Using the discounted free cash flow model and a weighted average cost of capital of 14%:
a. Estimate the enterprise value of Heavy Metal.
b. If Heavy Metal has no excess cash, debt of $300 million, and 40 million shares outstanding, estimate its share price.
919. IDX Technologies is a privately held developer of advanced security systems based in Chicago. As part of your business development strategy, in late 2008 you initiate discussions with IDX’s founder about the possibility of acquiring the business at the end of 2008. Estimate the value of IDX per share using a discounted FCF approach and the following data:
? Debt: $30 million
? Excess cash: $110 million
? Shares outstanding: 50 million
? Expected FCF in 2009: $45 million
? Expected FCF in 2010: $50 million
? Future FCF growth rate beyond 2010: 5%
? Weightedaverage cost of capital: 9.4%
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921. Consider the valuation of Kenneth Cole Productions in Example 9.7.
a. Suppose you believe KCP’s initial revenue growth rate will be between 4% and 11% (with growth slowing in equal steps to 4% by year 2011). What range of share prices for KCP is consistent with these forecasts?
b. Suppose you believe KCP’s EBIT margin will be between 7% and 10% of sales. What range of share prices for KCP is consistent with these forecasts (keeping KCP’s initial revenue growth at 9%)?
c. Suppose you believe KCP’s weighted average cost of capital is between 10% and 12%. What range of share prices for KCP is consistent with these forecasts (keeping KCP’s initial revenue growth and EBIT margin at 9%)?
d. What range of share prices is consistent if you vary the estimates as in parts (a), (b), and (c) simultaneously?
a
922. You notice that PepsiCo has a stock price of $52.66 and EPS of $3.20. Its competitor, the CocaCola Company, has EPS of $2.49. Estimate the value of a share of CocaCola stock using only this data.
923. Suppose that in January 2006, Kenneth Cole Productions had EPS of $1.65 and a book value of equity of $12.05 per share.
a. Using the average P/E multiple in Table 9.1, estimate KCP’s share price.
b. What range of share prices do you estimate based on the highest and lowest P/E multiples in Table 9.1?
c. Using the average price to book value multiple in Table 9.1, estimate KCP’s share price.
d. What range of share prices do you estimate based on the highest and lowest price to book value multiples in Table 9.1?
924. Suppose that in January 2006, Kenneth Cole Productions had sales of $518 million, EBITDA of $55.6 million, excess cash of $100 million, $3 million of debt, and 21 million shares outstanding.
a. Using the average enterprise value to sales multiple in Table 9.1, estimate KCP’s share price.
b. What range of share prices do you estimate based on the highest and lowest enterprise value to sales multiples in Table 9.1?
c. Using the average enterprise value to EBITDA multiple in Table 9.1, estimate KCP’s share price.
d. What range of share prices do you estimate based on the highest and lowest enterprise value to EBITDA multiples in Table 9.1?
925. In addition to footwear, Kenneth Cole Productions designs and sells handbags, apparel, and other accessories. You decide, therefore, to consider comparables for KCP outside the footwear industry.
a. Suppose that Fossil, Inc., has an enterprise value to EBITDA multiple of 9.73 and a P/E multiple of 18.4. What share price would you estimate for KCP using each of these multiples, based on the data for KCP in Problems 23 and 24?
b. Suppose that Tommy Hilfiger Corporation has an enterprise value to EBITDA multiple of 7.19 and a P/E multiple of 17.2. What share price would you estimate for KCP using each of these multiples, based on the data for KCP in Problems 23 and 24?
.
926. Consider the following data for the airline industry in early 2009 (EV = enterprise value, BV = book value, NM = not meaningful because divisor is negative). Discuss the challenges of using multiples to value an airline.
927. You read in the paper that Summit Systems from Problem 6 has revised its growth prospects and now expects its dividends to grow at 3% per year forever.
a. What is the new value of a share of Summit Systems stock based on this information?
b. If you tried to sell your Summit Systems stock after reading this news, what price would you be likely to get and why?
928. In early 2009, CocaCola Company had a share price of $46. Its dividend was $1.52, and you expect CocaCola to raise this dividend by approximately 7% per year in perpetuity.
a. If CocaCola’s equity cost of capital is 8%, what share price would you expect based on your estimate of the dividend growth rate?
b. Given CocaCola’s share price, what would you conclude about your assessment of CocaCola’s future dividend growth?
929. Roybus, Inc., a manufacturer of flash memory, just reported that its main production facility in Taiwan was destroyed in a fire. While the plant was fully insured, the loss of production will decrease Roybus’ free cash flow by $180 million at the end of this year and by $60 million at the end of next year.
a. If Roybus has 35 million shares outstanding and a weighted average cost of capital of 13%, what change in Roybus’ stock price would you expect upon this announcement? (Assume the value of Roybus’ debt is not affected by the event.)
b. Would you expect to be able to sell Roybus’ stock on hearing this announcement and make a profit? Explain.
930. Apnex, Inc., is a biotechnology firm that is about to announce the results of its clinical trials of a potential new cancer drug. If the trials were successful, Apnex stock will be worth $70 per share. If the trials were unsuccessful, Apnex stock will be worth $18 per share. Suppose that the morning before the announcement is scheduled, Apnex shares are trading for $55 per share.
a. Based on the current share price, what sort of expectations do investors seem to have about the success of the trials?
b. Suppose hedge fund manager Paul Kliner has hired several prominent research scientists to examine the public data on the drug and make their own assessment of the drug’s promise. Would Kliner’s fund be likely to profit by trading the stock in the hours prior to the announcement?
c. What would limit the fund’s ability to profit on its information?

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Solution: Financial Planning Problems