Founders of a firm put up 140 million at time 1 to be withdrawn completely at time 2 by selling the firm to new stockholders. The 140 million investment will generate the following cash earnings: 55 million, 72.60 million and 93.17 million at times 2,3 and 4 respectively. The market interest rate is 10% in all periods. What are the market values of the firm in every period? What is the rate of return for the original stockholders? What is the rate of return for the new stockholders?

Founders of a firm put up 140 million at time 1 to be withdrawn completely at time 2 by selling the firm to new stockholders. The 140 million investment will generate the following cash earnings: 55 million, 72.60 million and 93.17 million at times 2,3 and 4 respectively. The market interest rate is 10% in all periods. What are the market values of the firm in every period? What is the rate of return for the original stockholders? What is the rate of return for the new stockholders?

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter7: Valuation Of Stocks And Corporations

Section7.6: Valuing Nonconstant Growth Stocks

Problem 3ST

See similar textbooks

Similar questions

A firm pays a current dividend of $2, which is expected to grow at a rate of 3% indefinitely. If the current value of the firm’s shares is $25, what is the required return applicable to the investment based on the constant-growth model?
Suppose the interest rate is 12 percent and the firm is expected to grow at a rate of 7 percent for the foreseeable future. The firm's current profits are P50 million. What is the value of the firm (the present value of its current and future. earnings)?
Question: Hart Enterprises recently paid a dividend of $1.25. It expects to have non constant growth of 20% for 2 years followed by a constant rate of 5% thereafter. The firm's required return is 10%. a. How far away is the terminal, or horizon, date? b. What is the firm's horizon, or terminal, value? c. What is the firm's intrinsic value today?
Kimbi Limited had the following items on its balance sheet at the beginning of the year: Assets Cash Property Plant & Equipment Liabilities and equity $50,000 Debt $ 350,000 Equity $ 100, 000 $ 300,000 The net profit this year is $20, 000 with a dividend of $5, 750.
A firmrecently paid a dividend, D0, of $1.25. It expects to have nonconstant growth of 13% for 2 years followed by a constant rate of 8% thereafter. The firm's required return is 18%. What is the firm's horizon, or continuing, value? Do not round intermediate calculations. Round your answer to the nearest cent. What is the firm's intrinsic value today? Do not round intermediate calculations. Round your answer to the nearest cent.
Whizcom Inc. is expected to pay a dividend of $1 next period. Dividends are expected to grow at 2% per year and the investors require a return of 12%. a) What would be the likely stock price in year 5? b) What would be per annum rate of return implied by a change in prices from time 0 to time 5?
Assume that the economy can experience high growth, normal growth, or recession. Under these conditions, you expect the following stock market returns for the coming year: State of the Economy High Growth Normal Growth Recession Probability 0.2 0.7 0.1 Return 60% 18% 2% a. Compute the expected value of a $1,000 investment over the coming year. If you invest $1,000 today, how much money do you expect to have next year? What is the percentage expected rate of return? Instructions: Enter dollar values rounded to the nearest whole dollar and percentages rounded to one decimal place. The expected value is $ and the expected rate of return is b. Compute the standard deviation of the percentage return over the coming year. Standard deviation = % = %. c. If the risk-free return is 7 percent, what is the risk premium for a stock market investment? Risk premium %
Consider the table given below to answer the following question. The long-run growth rate is projected at 5% and discount rate is 10%. Year Asset value Earnings Net investment Free cash flow (FCF) Return on equity (ROE) Asset growth rate Earnings growth rate 1 2 3 4 5 6 7 8 15.00 16.65 18.48 20.51 22.16 23.93 25.84 27.13 1.65 1.83 1.65 1.83 Present value 0.11 0.11 9 10 28.49 29.92 2.03 2.26 2.44 2.51 2.58 2.58 1.99 2.09 2.03 1.64 1.77 1.91 1.29 1.36 1.42 1.50 0.62 0.66 0.60 1.29 1.22 0.57 0.60 0.11 0.11 0.11 0.11 0.105 0.10 0.095 0.07 0.11 0.11 0.08 0.08 0.08 0.05 0.05 0.05 0.05 0.11 0.11 0.11 0.08 0.03 0.03 0.00 -0.23 0.05 0.07 Assuming that competition drives down profitability (on existing assets as well as new investment) to 10.5% in year 6, 10% in year 7, 9.5% in year 8, and 7% in year 9 and all later years. What is the value of the concatenator business? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) million
Consider the table given below to answer the following question. The long-run growth rate is projected at 5% and discount rate is 10%. Year Asset value Earnings Net investment Free cash flow (FCF) Return on equity (ROE) Asset growth ratei Earnings growth rate 1 2 4 5 6 7 8 10 28.49 29.92 15.00 16.65 18.48 20.51 22.16 23.93 25.84 27.13 1.65 1.83 2.03 1.65 1.83 2.03 1.99 2.09 1,42 1.50 2.26 2.44 2.51 2.58 2.58 1.64 1.77 1.91 1.29 1.36 0.62 9.66 0.60 1.29 1.22 0.11 0.11 0.11 0.11 0.11 0.105 0.10 0.095 0.11 0.11 0.11 0.08 0.08 0.00 0.05 0.05 0.05 0.11 0.11 0.11 0.08 0.57 0.60 0.07 9.07 0.05 0.03 0.03 0.00 -0.23 0.05 Assuming that competition drives down profitability (on existing assets as well as new investment) to 10.5% in year 6, 10% in year 7. 9.5% in year 8, and 7% in year 9 and all later years. What is the value of the concatenator business? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) Present value million
A Company is expected to pay a dividend of sh2 in the upcoming year. The risk-free rate of return is 4% and the expected return on the market portfolio is 14%. Analysts expect the price of the Company shares to be sh22 a year from now. The beta of the Company's stock is 1.25. Required: a. If the Company's intrinsic value is sh21.00 today, what must be its growth rate? Select one: a. 7% b. 4% c. 10% d. 6% e. 0.0% b. The market's required rate of return on the Company’s stock is _ Select one: a. 16.5% b. 17.5% c. 15.25% d. 14.0% e. none of the above c. What is the intrinsic value of the Company's stock today? Select one: a. sh12.12 b. sh20.00 c. sh22.00 d. none of the above e. sh20.60
Holt Enterprises recently paid a dividend, D0,of $2.75. It expects to have nonconstant growth of 18% for 2 years followed by a constant rate of 6% thereafter. The firm's required return is 12%. A) How far away is the horizon date? B) What is the firm's horizon, or continuing, value? C) What is the firm's intrinsic value today, P0?
Given that the NPV per share of the reinvestment of the retained earnings next year for a firm is $2.50. Assuming the growth of the NPV is constant at 5% each year, with the required return rate of 12%, what is the estimated Present Value of Growth Opportunity (PVGO)? a. $35.71 b. $59.23 c. $46.75 d. $24.56