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Assume that today is December 31, 2012, and that the following information applies to Vermeil Airlines: ⋅ Aftertax operating income [EBIT(1  T)] for 2013 is expected to be $500 million. Using the corporate valuation model approach, what should be the company's stock price today? Round your answer to the nearest cent. Write out your answer completely. For example, 0.00013 million should be entered as 130. $ ________ 
2. Constant growth valuation Thomas Brothers is expected to pay a $3.5 per share dividend at the end of the year (that is, D_{1} = $3.5). The dividend is expected to grow at a constant rate of 9% a year. The required rate of return on the stock, r_{s}, is 17%. What is the stock's current value per share? Round your answer to two decimal places. $ ________

3. Nonconstant growth stock valuation Taussig Technologies Corporation (TTC) has been growing at a rate of 18% per year in recent years. This same growth rate is expected to last for another 2 years, then decline to g_{n} = 5%. a. If D_{0} = $1.40 and r_{s} = 12.00%, what is TTC's stock worth today? Round your answer to the nearest cent. 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? I. Due to the longer period of supernormal growth, the value of the stock will be higher for each year. Although the total return will remain the same, the distribution between dividend yield and capital gains yield will differ for the duration of the supernormal growth period. II. Due to the longer period of supernormal growth, the value of the stock will be lower for each year. Although the total return will remain the same, the distribution between dividend yield and capital gains yield will differ for the duration of the supernormal growth period. III. Due to the longer period of supernormal growth, the value of the stock will be higher for each year. The total return as well as the distribution between dividend yield and capital gains yield will differ for the duration of the supernormal growth period. IV. Due to the longer period of supernormal growth, the value of the stock will be higher for each year. The total return as well as the distribution between dividend yield and capital gains yield will remain the same for the duration of the supernormal growth period. V. Due to the longer period of supernormal growth, the value of the stock will be lower for each year. The total return as well as the distribution between dividend yield and capital gains yield will differ for the duration of the supernormal growth period.
c. What will TTC's dividend and capital gains yields be once its period of supernormal growth ends? (Hint: These values will be the same regardless of whether you examine the case of 2 or 5 years of supernormal growth; the calculations are very easy.) d. Of what interest to investors is the changing relationship between dividend and capital gains yields over time? I. Some investors need cash dividends, while others would prefer growth. Also, investors must pay taxes each year on the dividends received during the year, while taxes on the capital gain can be delayed until the gain is actually realized. II. Some investors need cash dividends, while others would prefer growth. Also, investors must pay taxes each year on the capital gain during the year, while taxes on the dividends can be delayed until the stock is sold. III. It is of no interest to investors whether they receive dividend income or capital gains income, since both types of income are always taxed at the same rate. IV. It is of no interest to investors whether they receive dividend income or capital gains income, since taxes on both types of income must be paid in the current year. V. It is of no interest to investors whether they receive dividend income or capital gains income, since taxes on both types of income can be delayed until the stock is sold.

4. Valuation of a declining growth stock Martell Mining Company's ore reserves are being depleted, so its sales are falling. Also, because its pit is getting deeper each year, its costs are rising. As a result, the company's earnings and dividends are declining at the constant rate of 6% per year. If D_{0} = $4 and r_{s} = 12%, what is the value of Martell Mining's stock? Round your answer to two decimal places. $ ________ 
5. Nonconstant growth Assume that it is now January 1, 2013. WayneMartin Electric Inc. (WME) has just developed a solar panel capable of generating 200% more electricity than any other solar panel currently on the market. As a result, WME is expected to experience a 15% annual growth rate for the next 5 years. Other firms will have developed comparable technology at the end of 5 years, and WME's growth rate will slow to 5% per year indefinitely. Stockholders require a return of 12% on WME's stock. The most recent annual dividend (D_{0}), which was paid yesterday, was $1.75 per share. a. Calculate WME's expected dividends for 2013, 2014, 2015, 2016 and 2017. Round your answers to the nearest cent. b. Calculate the value of the stock today, Pˆ0. Proceed by finding the present value of the dividends expected at the end of 2013, 2014, 2015, 2016 and 2017 plus the present value of the stock price that should exist at the end of 2017. The yearend 2017 stock price can be found by using the constant growth equation. Notice that to find the December 31, 2017, price, you must use the dividend expected in 2018, which is 5% greater than the 2017 dividend. c. Calculate the expected dividend yield (D_{1}/P_{0}), capital gains yield, and total return (dividend yield plus capital gains yield) expected for 2013. (Assume that Pˆ0 = P0 and recognize that the capital gains yield is equal to the total return minus the dividend yield.) Round your answers to two decimal places. d. How might an investor's tax situation affect his or her decision to purchase stocks of companies in the early stages of their lives, when they are growing rapidly, versus stocks of older, more mature firms? When does WME's stock become "mature" for purposes of this question? I. Some investors need cash dividends, while others would prefer growth. Investors must pay taxes each year on the capital gain during the year, while taxes on the dividends can be delayed until the stock is sold. The firm's stock is "mature" at the end of 2018. II. It is of no interest to investors whether they receive dividend income or capital gains income, since both types of income are always taxed at the same rate. The firm's stock is "mature" at the end of 2018. III. It is of no interest to investors whether they receive dividend income or capital gains income, since taxes on both types of income must be paid in the current year. The firm's stock is "mature" at the end of 2018. IV. It is of no interest to investors whether they receive dividend income or capital gains income, since taxes on both types of income can be delayed until the stock is sold. The firm's stock is "mature" at the end of 2018. V. Some investors need cash dividends, while others would prefer growth. Investors must pay taxes each year on the dividends received during the year, while taxes on the capital gain can be delayed until the gain is actually realized. The firm's stock is "mature" at the end of 2018.
e. Suppose your boss tells you she believes that WME's annual growth rate will be only 12% during the next 5 years and that the firm's long run growth rate will be only 4%. Without doing any calculations, what general effect would these growthrate changes have on the price of WME's stock? I. Since the firm's supernormal and normal growth rates are lower, the dividends and, hence, the present value of the stock price will be lower. The total return from the stock will remain the same, but the dividend yield will be larger and the capital gains yield will be smaller than they were with the original growth rates. II. Since the firm's supernormal and normal growth rates are lower, the dividends and, hence, the present value of the stock price will be lower. The total return from the stock will remain the same, but the dividend yield will be smaller and the capital gains yield will be larger than they were with the original growth rates. III. Since the firm's supernormal and normal growth rates are lower, the dividends and, hence, the present value of the stock price will be lower. The total return from the stock will decline, and both the dividend yield and the capital gains yield will be smaller than they were with the original growth rates. IV. Since the firm's supernormal and normal growth rates are lower, the dividends and, hence, the present value of the stock price will be lower. The total return from the stock will increase, and both the dividend yield and the capital gains yield will be greater than they were with the original growth rates. V. Since the firm's supernormal and normal growth rates are lower, the dividends and, hence, the present value of the stock price will be lower. The total return from the stock will decline, and the dividend yield and the capital gains yield will be the same.
f. Suppose your boss also tells you that she regards WME as being quite risky and that she believes the required rate of return should be 14%, not 12%. Without doing any calculations, determine how the higher required rate of return would affect the price of the stock, the capital gains yield, and the dividend yield? Again, assume that the longrun growth rate is 4%. I. As the required return increases, the price of the stock goes down, but both the capital gains and dividend yields decrease initially. II. As the required return increases, the price of the stock goes up, and both the capital gains and dividend yields increase initially. III. As the required return increases, the price of the stock goes up, and both the capital gains and dividend yields decrease initially. IV. As the required return increases, the price of the stock remains the same since both the capital gains and dividend yields remain constant. V. As the required return increases, the price of the stock goes down, but both the capital gains and dividend yields increase initially.

6. Constant growth valuation Harrison Clothiers' stock currently sells for $30 a share. It just paid a dividend of $2 a share (that is, D_{0} = 2). The dividend is expected to grow at a constant rate of 10% a year. a. What stock price is expected 1 year from now? Round your answer to two decimal places. b. What is the required rate of return? Round your answers to two decimal places.

7. Constant growth Your broker offers to sell you some shares of Bahnsen & Co. common stock that paid a dividend of $4.00 yesterday. Bahnsen's dividend is expected to grow at 5% per year for the next 3 years. If you buy the stock, you plan to hold it for 3 years and then sell it. The appropriate discount rate is 12%. a. Find the expected dividend for each of the next 3 years; that is, calculate D_{1}, D_{2} and D_{3}. Note that D_{0} = $4.00. Round your answer to the nearest cent. b. Given that the first dividend payment will occur 1 year from now, find the present value of the dividend stream; that is, calculate the PVs of D_{1}, D_{2}, and D_{3} and then sum these PVs. Round your answer to the nearest cent. c. You expect the price of the stock 3 years from now to be $69.46; that is, you expect Pˆ3 to equal $69.46. Discounted at a 12% rate, what is the present value of this expected future stock price? In other words, calculate the PV of $69.46. Round your answer to the nearest cent. d. If you plan to buy the stock, hold it for 3 years, and then sell it for $69.46, what is the most you should pay for it today? Round your answer to the nearest cent. e. Use equation below to calculate the present value of this stock. f. Is the value of this stock dependent upon how long you plan to hold it? In other words, if your planned holding period was 2 years or 5 years rather than 3 years, would this affect the value of the stock today, Pˆ0? I. Yes. The value of the stock is dependent upon the holding period. The value calculated in Parts a through d is the value for a 3year holding period. It is not equal to the value calculated in Part e. Any other holding period would produce a different value of Pˆ0. II. Yes. The value of the stock is dependent upon the holding period due to the fact that the value is determined as the present value of all future expected dividends. III. No. The value of the stock is not dependent upon the holding period unless the growth rate remains constant for the foreseeable future. IV. Yes. The value of the stock is dependent upon the holding period as long as the growth rate remains constant for the foreseeable future. V. No. The value of the stock is not dependent upon the holding period. The value calculated in Parts a through d is the value for a 3year holding period. It is equal to the value calculated in Part e. Any other holding period would produce the same value of Pˆ0.

8.Preferred stock returns Bruner Aeronautics has perpetual preferred stock outstanding with a par value of $100. The stock pays a quarterly dividend of $2, and its current price is $123. a. What is its nominal annual rate of return? Round your answer to two decimal places. b. What is its effective annual rate of return? Round your answer to two decimal places.

9. Valuation of a constant growth stock Investors require a 16% rate of return on Levine Company's stock (that is, r_{s} = 16%). a. What is its value if the previous dividend was D_{0} = $3.75 and investors expect dividends to grow at a constant annual rate of (1) 4%, (2) 0%, (3) 4%, or (4) 10%? Round answers to the nearest hundredth. b. Using data from part a, what would the Gordon (constant growth) model value be if the required rate of return was 15% and the expected growth rate were (1) 15% or (2) 20%? Are these reasonable results? I. The results show that the formula does not make sense if the required rate of return is equal to or greater than the expected growth rate. II. The results show that the formula makes sense if the required rate of return is equal to or less than the expected growth rate. III. The results show that the formula makes sense if the required rate of return is equal to or greater than the expected growth rate. IV. These results show that the formula does not make sense if the expected growth rate is equal to or less than the required rate of return. V. The results show that the formula does not make sense if the required rate of return is equal to or less than the expected growth rate.
c. Is it reasonable to think that a constant growth stock could have g > r_{s}? I. It is not reasonable for a firm to grow indefinitely at a rate lower than its required return. II. It is not reasonable for a firm to grow indefinitely at a rate equal to its required return. III. It is not reasonable for a firm to grow indefinitely at a rate higher than its required return. IV. It is reasonable for a firm to grow indefinitely at a rate higher than its required return. V. It is not reasonable for a firm to grow even for a short period of time at a rate higher than its required return.


10. Corporate valuation Dozier Corporation is a fastgrowing supplier of office products. Analysts project the following free cash flows (FCFs) during the next 3 years, after which FCF is expected to grow at a constant 6% rate. Dozier's WACC is 14%.
a. What is Dozier's horizon, or continuing, value? (Hint: Find the value of all free cash flows beyond Year 3 discounted back to Year 3.) Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $13,550,000 should be entered as 13.55. b. What is the firm's value today? Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $13,550,000 should be entered as 13.55. c. Suppose Dozier has $99 million of debt and 13 million shares of stock outstanding. What is your estimate of the price per share? Round your answer to two decimal places. Write out your answer completely. For example, 0.00025 million should be entered as 250. 
Subject  Business 
Due By (Pacific Time)  11/16/2013 02:00 pm 
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