QUESTION 2
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Answer the following questions:
a. In dollars and cents, what is the fair value of a stock that has just paid a dividend of $12.54, which is expected to grow indefinitely at 1.88% per annum, and that has a cost of capital of 12.36%? (1 mark)
b. If the historical dividend yield of a stock is 4.57% and the stock's cost of capital is 10.58%, what is its expected growth rate in percentage terms to 2 decimal places? (1 mark)
c. In dollars and cents, what is the maximum you would pay per share for a company that generated profits of $6.98 per share on its 4,387.5 million shares from which it paid a dividend of $4.66 per share and has equity capital of $378 billion if its cost of capital is 15.55%? (1 mark)
d. In dollars and cents, what is the maximum you would pay per share for a company that generated profits of $12.774 per share, has 765 million shares on issue, just paid a dividend of $9.695 per share, has equity capital of $134.5 billion according to its accounts, has a standard deviation of 44.63%, where the standard deviation of the market is 18.94%, the return of the market is 14.65%, the stock's correlation with the market is 0.84, and the risk-free rate of return is 5.25%? (2 marks)
e. In dollars and cents, what is the maximum price you would pay for the shares of a company that had the following operating cash flow and capital expenditure over the next four years provided in the table below when your estimated value of the company in the fifth year, when you planned to sell your shares in the company is $970 million, the weighted average cost of capital of the company is 12.86%, its value of debt is $325 million, and there are 40 million outstanding shares? (3 marks)
Period
Operating cash flow $35,000,000 $36,750,000 $39,500,000 $42,500,000
Capital expenditure $7,000,000 $6,500,000 $6,000,000 $6,500,000
What is the P/E ratio for a stock which has a consistent payout ratio of 62%, a return on equity of 20%, and a cost of capital of 13%? (2 marks)
