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    Chap 11 & 12

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    Elizabeth
    This document contains tutorials on bond and stock valuation. It discusses calculating bond prices given interest rates, discount rates, and cash flows. It also covers stock valuation using dividend discount models and P/E ratios. Key formulas introduced include the dividend discount model to value stocks based on expected dividends and growth, and using the P/E ratio of comparable companies to estimate stock prices. Sample calculations value preferred stocks, common stocks, and entire companies using discounted cash flow approaches.

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    Chap 11 & 12

    Uploaded by

    Elizabeth
    38 views4 pages
    This document contains tutorials on bond and stock valuation. It discusses calculating bond prices given interest rates, discount rates, and cash flows. It also covers stock valuation using dividend discount models and P/E ratios. Key formulas introduced include the dividend discount model to value stocks based on expected dividends and growth, and using the P/E ratio of comparable companies to estimate stock prices. Sample calculations value preferred stocks, common stocks, and entire companies using discounted cash flow approaches.

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    This document contains tutorials on bond and stock valuation. It discusses calculating bond prices given interest rates, discount rates, and cash flows. It also covers stock valuation using dividend discount models and P/E ratios. Key formulas introduced include the dividend discount model to value stocks based on expected dividends and growth, and using the P/E ratio of comparable companies to estimate stock prices. Sample calculations value preferred stocks, common stocks, and entire companies using discounted cash flow approaches.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    38 views4 pages

    Chap 11 & 12

    Uploaded by

    Elizabeth
    This document contains tutorials on bond and stock valuation. It discusses calculating bond prices given interest rates, discount rates, and cash flows. It also covers stock valuation using dividend discount models and P/E ratios. Key formulas introduced include the dividend discount model to value stocks based on expected dividends and growth, and using the P/E ratio of comparable companies to estimate stock prices. Sample calculations value preferred stocks, common stocks, and entire companies using discounted cash flow approaches.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 4

    BBMF2093 CORPORATE FINANCE

    TUTORIAL 11 & 12 : THE VALUATION AND CHARACTERISTIC OF BONDS AND


    STOCKS

    1. Assume that you wish to purchase a bond with a 30-year maturity, an annual coupon
    rate of 10 percent, a face value of $1,000, and semiannual interest payments. If you require a
    9 percent nominal yield to maturity on this investment, what is the maximum price you
    should be willing to pay for the bond?

    2. You intend to purchase a 10-year, $1,000 face value bond that pays interest of $60 every
    6 months. If your nominal annual required rate of return is 10 percent with semiannual
    compounding, how much should you be willing to pay for this bond?
    From financial calculator,
    Face value= $1,000
    N=10 years x 2 = 20 years
    Annual coupon= $60
    Compounding = semiannual
    I/Y= 10%/2=5%
    Price=$1,124.62

    3. A share of common stock has just paid a dividend of $3.00. If the expected long-run
    growth rate for this stock is 5 percent, and if investors require an 11 percent rate of return,
    what is the price of the stock?
    Using Dividend Discount Model,
    P=D0(1+g)/(r-g)
    D0=3, g=5%, r=11%
    P=$52.50

    4. The Jones Company has decided to undertake a large project. Consequently, there is a
    need for additional funds. The financial manager plans to issue preferred stock with a
    perpetual annual dividend of $5 per share and a par value of $30. If the required return on
    this stock is currently 20 percent, what should be the stock's market value?
    Using Dividend Discount Model,
    P=D0(1+g)/(r-g)
    D0=5, g=0%, r=20%
    P=$52.50

    5. *A share of preferred stock pays a quarterly dividend of $2.50. If the price of this
    preferred stock is currently $50, what is the nominal annual rate of return?
    Annual dividend= $2.50(4)=$10
    Vps= Dps/rps
    Rps=Dps/Vps= $10/$50=0.20=20%

    6. *DFB, Inc., expects earnings this year of $5 per share, and it plans to pay a $3 dividend to
    shareholders. DFB will retain $2 per share of its earnings to reinvest in new projects with an
    expected return of 15% per year. Suppose DFB will maintain the same dividend payout rate,
    retention rate, and return on new investments in the future and will not change its number of
    outstanding shares.
    (a) What growth rate of earnings would you forecast for DFB?
    Retention rate or ploughback ratio= 2/5= 40%
    Return on investment=15%
    G=retention rate/plowback ratio x return on investment= (2/5)x15%=6%

    (b) If DFB’s equity cost of capital is 12%, what price would you estimate for DFB stock?
    DDM,
    D1=3, r=12%, g=6%
    P= D1 /r-g=3/(12%-6%)=$50

    (c) Suppose DFB instead paid a dividend of $4 per share this year and retained only $1 per
    share in earnings. That is, it chose to pay a higher dividend instead of reinvesting in as
    many new projects. If DFB maintains this higher payout rate in the future, what stock
    price would you estimate now?
    Earning=$5, dividend payout=$4, retention=$1
    Retention rate=1/5=20%
    G=(1/5)x15%=3%
    DDM formula,
    P=D0(1+g)/(r-g)
    =D1/(r-g)
    =4/(12%-3%)
    =$44.44

    Conclusion:
    Higher retention $2, Higher growth 6%, Higher stock price $50
    Lower retention $1, Lower growth 3%, Lower stock price $44.44

    TUTORIAL 12 VALUATION OF COMPANIES

    1. *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%
    ■ Weighted-average cost of capital: 9.4%

    Corporate valuation model:


    From 2010 onwards, we expect FCF to grow at a 5% rate. Thus, using the growing perpetuity
    formula, we can estimate IDX’s Terminal Enterprise Value in 2009= $50/(9.4%-5%)=$1136
    Adding the 2009 cash flow and discounting, we have
    Enterprise value in 2008= ($45+$1136)/(1.094)=$1080
    Adjusting for cash and debt (net debt), we estimate that,
    Equity value of the firm= MV of firm + cash -MV debt
    =$1080+ $110m-$30m=$1160m
    Dividing by number of shares:
    Stock share=$1160m/50m=$23.20

    1. Anle Corporation has a current price of $20, is expected to pay a dividend of $1 in one
    year, and its expected price right after paying that dividend is $22.

    (a) What is Anle’s expected dividend yield?


    1/20=5%
    (b) What is Anle’s expected capital gain rate?
    (22-20)/20=10%
    (c) What is Anle’s equity cost of capital?
    (d) 5%=10%=15%

    2. Krell Industries has a share price of $22 today. If Krell is expected to pay a dividend of
    $0.88 this year, and its stock price is expected to grow to $23.54 at the end of the year, what
    is Krell’s dividend yield and equity cost of capital?

    Dividend yield= 0.88/22=4%


    Capital gain rate= (23.54-22.00)/22.00=7%
    Total equity cost of capital (expected return for investor)= 4%+7%=11%

    3. You notice that PepsiCo has a stock price of $52.66 and EPS of $3.20. Its competitor, the
    Coca-Cola Company, has EPS of $2.49. Estimate the value of a share of Coca-Cola stock
    using only this data.
    PepsiCo:
    P/E=52.66/3.20=16.46x
    Coca-cola:
    Share price for coca cola EPSxP/E= $2.49x16.46=$40.98
    P/E ratio= price per share/ earnings per share

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