Chapter 4: Q13-14I (page 437)
A common stock pays an annual dividend per share of \(2.10. The risk-free rate is 7% and the risk premium for this stock is 4%. If the annual dividend is expected to remain at \)2.10, what is the value of the stock?
Answer
$19.09
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Use the following cash flow data for Rocket Transport to find Rocket’s:
a. Net cash provided by or used in investing activities.
b. Net cash provided by or used in financing activities.
c. Net increase or decrease in cash for the year.
Peninsular Research is initiating coverage of a mature manufacturing industry. John Jones, CFA, head of the research department, gathered the following fundamental industry and market data to help in his analysis:
Forecast Industry earnings retention rate | 40% |
Forecast industry returns on equity | 25% |
Industry beta | 1.2 |
Government bond yield | 6% |
Equity risk premium | 5% |
a. Compute the price-to-earnings (P0 / E1) ratio for the industry based on this fundamental data.
b. Jones wants to analyze how fundamental P/E ratios might differ among countries. He gathered the following economic and market data:
Fundamental factors | Country A | Country B |
Forecast growth in real GDP | 5% | 2% |
Government bond yield | 10% | 6% |
Equity risk premium | 5% | 4% |
Determine whether each of these fundamental factors would cause P/E ratios to be generally higher for Country A or higher for Country B.
Janet Ludlow’s firm requires all its analysts to use a two-stage DDM and the CAPM to value stocks. Using these measures, Ludlow has valued QuickBrush Company at \(63 per share. She now must value SmileWhite Corporation.
a. Calculate the required rate of return for SmileWhite using the information in the following table:
December 2010 | ||
Quick brush | Smile white | |
Beta | 1.35 | 1.15 |
Market price | \)45 | \(30 |
Intrinsic value | \)63 | ? |
b. Ludlow estimates the following EPS and dividend growth rates for SmileWhite:
First three years | 12% per year |
Years thereafter | 9% per year |
Estimate the intrinsic value of SmileWhite using the table above and the two-stage DDM. Dividends per share in 2010 were $1.72.
c. Recommend QuickBrush or SmileWhite stock for purchase by comparing each company’s intrinsic value with its current market price.
d. Describe one strength of the two-stage DDM in comparison with the constant-growth DDM. Describe one weakness inherent in all DDMs.
Here are four industries and four forecasts for the macro-economy. Choose the industry that you would expect to perform best in each scenario.
Industries: housing construction, health care, gold mining, steel production.
Economic Forecasts:
Deep recession: falling inflation, falling interest rates, falling GDP.
Superheated economy: rapidly rising GDP, increasing inflation and interest rates.
Healthy expansion: rising GDP, mild inflation, low unemployment.
Stagflation: falling GDP, high inflation.
If you believe the U.S. dollar is about to depreciate more dramatically than do other investors, what will be your stance on investments in U.S. auto producers?
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