capm stock valuation

8/11/2019 CAPM Stock Valuation

1/11

Beta

coefficient

,.ylHenrico'

stock

is

currently

selling

tor(:d

ashare.

Tlre

stock

is

expected

to

pay

1

eitividenU

at the end

of

the

year.

The stock'i-il-ividend is expeaed to

grow

at

a constan-t

rate

pf

7

percent

a

year

forever.

The risk-free rate

(f,*)

(S

percent

and

the

market risk

premium

(kM-

-

kse) is

alsq 6frcent. What

is

the

stock'-s

Oetal

L

-"3

=

a. .a',; ,

r

-

o,o)

40(

_

.l.k

__

r

rtor

-

q.?

Expected Return

2. Given

a

beta of

1.25, Risk

Free

Rate

of

7.5o/o,

and market risk

premium

expected on the

stocks

is

6Yo, What is the expected rate of return of stock of Henrika Company?

I

I

r:Yr+

f('rt


2/11

Stock

price

and P/E

ratio

6.

During

the

past

few

years,

Jamila Company

has

retained,

on

the

average,

70

percent

of

its

earnings

in

the

business.

The future

retention

rate

is expected

to

remain at

70

percent

of

earnings,

and long-run

earnings

groMh

is

expected

to

be

1O

percent.

lf

the

risk-free rate,

kp6,

is 8

percent,

the

expected

return on

the

market,

ky,

is

12

percent,

Swanson's beta

is

2,0,

and the

most

recent

dividend,

De, wos

P1.50,

what

is the

most

likely

market

price

and P/E

ratio

(Ps/E1)

for

Jamila's

stock

today?

HP

=

2t.S

P/t t*ti"

:

s:

I

Stock

price

7

'

You

have

been

given

the following

projections

for

Apol Corporation

for

the coming

year.

o

Sales

=

10,000

units.

a

a

a

a

a

a

Sales

price

per

unit

=

P10.

Variable

cost

per

unit

=

P5.

Fixed

costs

=

P10,000.

Bonds

outstanding

=

P15,000.

Q

on

outstanding

bonds

=

8%.

Tax

rate

=

4O%o.

f

2

s/.

+

l.q

(a,as't.)

( r

lo.a'1.

D'r,

'-

l.51ceg

o.loc -o.ol

PS:

2t?

-

L....,a

lc,.cDo

po9

:

co'|.

l.slcog

z-57.t

$=

o

Shares

of common

stock outstanding

=

10,000

shares.

.

Beta

=

1.4.

,

Growth

rate

=

8%, Dividend

Payout

Ratio

:

60%

'

knr

=

5%.

.

ku=9%.

Glculate the

current

price

per

share for Apol

Corporation.

s6.?2-

Preferred

stock

value

8.

ED-Bug

Corporation

is

growing

at

a

constant rate

of

6

percent per

year.

lt

has

both common

stock and

norr-participating

preferred

stock

outstanding.

The cost of

preferred

stock

(kr)

is

8

percent.

The

par

value

of

the

preferred

stock is P12O

and the stock

has

a

stated dividend

of

L0

percent

of

par,

What is

the

market value

of the

preferred

stock?

o.q

1zo(o't')

Constant

grorth

9.

MakDo

Com

k is

rtqp

per

share. The stock's

dividend

is

projected

to

a co

ercent

per year.

The

required rate

of

return

on the stock,

cent expected

price

ofthe

stock

4

yearsfrom

today?

?o-

LS

i'l

q

=

17.

P{

=

es

(r

''r)'

constantgrowthstock

".1

,".,.

.

-

ll

rare is

"*p"ffid

to

pay

a

year-end

dividend

o

)

)w

at a constant rate

over

time.

The

stock h

nd

the

market

risk

premium

is

{qgfent.

What

is

the

stock's expected

price

seven

years

from

today?

r=

9/.

*

,.,

("7.)

=

\t-/,

10

,J_

.tl

-x

/-

=

o.o(e

P?

=

.{o

(,.*)l

=

ia;;-

)


3/11

,

,

ry v . n : :-

. ugpgao, . ana o

Decllninggrmrth

stock

11.

The

Fortune

Company has

been hit

hard due

to

increased

competition,

The company's

analysts

predict

that

earnings

(and

dividends)

will

decline

at

a

rate of 5

percent

annually

forever.

Assume

that

k,

=

11

percent

and

Do

=

P2.00.

What will be

the

price

of

the

company's

stock three

years

from now?

Nonconstant

growth

stock

12. The

last

dividend

paid

by

JV

Company was

P1.00.

JV's

growth

rate

is

expected to

be a

constant

5

percent

for

2

years,

after

which

dividends are

expected

to

grow

at

a rate of 10

percent

forever.

JV's

required

rate of return on

equity

(kr)

is

12

percent,

What

is

the

current

price

of

JVs

common

stock?

b'l

3'

s7.

*zgo

(o7.

-+

caslq|

l-

G

l:-.l .

Nonconstant

growth

stock

Do=\

Dr.l.oS

D2

:

f

.ro25

D9.

l.LlLf

o.q"1g4-------J

o.Qsj9

o.&'rgq

2-----I1'

tlt.W8

{

Po=

so.sa7-

Pr:sS.te5

13. Bob UyTe lnc.

(BUTI) is

presently in

a

stage

of

abnormally

high

groMh

because

of

a

surge in

96

=

ls. l-ttg

R

.

|G.lo2.u

h

,

tG.8qc-r

i,

-

I l.

LD

Pq--

D.zr,

g

r

Lo7.

4>

ggry

Pra

=

tz.)S7.

o

-D

cas ryrf-

rV

=

y.-l

.

Dirro

.

l.9o

b=

t.G

Nonconstant

growth

stock

14. ADB

lndustries

expects

to

pay

a P3.00

per

share

dividend

on

its

common stock at the end of

?o,

51.o5 the

year.

The dividend ls expected

to

grow

25

percent

a

year

until t

=

3,

aftqqwhich

time

the

dividend

is

expected

to

grow

at

a

constant rate of 5

percent

a

year

(Og

=

Pa.e8)5 and

C

,

=

P4.921875).

The stock's beta

is 1.2, the

risk-free

rate

of

interest

is 5

percent,

and

the

Pq

=

19.

market

rate

of

return

is

11

percent.

What

is

the

company's

current

stock

price?

Div,

=

,

r=

G'/.,

t-z

(

tt

ct.)

(

=

l9't,

l.so

l.

{go

Pta.

tz.)s7,

o

-t

coggf-

lt

.

Y7,

Diro

.

l.sr)

l.s

r)

t.

(

L.\G z.sqa

c,Uot

l.

lto'[

bz

t.G

Nonconstant growth

stock

14.

ADB

lndustrles

expects

to

pay

a P3.00

per

share dividend

on its

common stock

at

the

end

of

51

o5

theyear.

The divldend

ls

expected

to

grow

25

percenta

y'ear

until

t

=

3, aflqr_which

time

the-(lvlden{

is

expected to

grow

at

a constant rate of

5

percent

a

year

6r_:

pf.oDs

and

C

.t'^.

---

^-l-.

(=j9.*2fi751,

The stock's

beta

is

1.2,

the

risk-free

rate

crf

interest is

5

percent,

and the

market

rate of return is 11

percent.

What

is

the company's

current

stock

price?

=

't9'

Div,

=

5

,i

er.

*

t.t

(

w'-

"r.)

----'-

r----'

n.

Ls'|..

-+

ca,'5

.

1il.

tr/. -+ co,$qf 7.1 3 ,.'t5.

q.6$s

.{.9zrr?

5-

r

l.z

rk.

61"

Nonconstantgrowth

stock

rH

-

ll7.

F'

91.os

$"

.

{.qx.L l:

t

-lo_e.zs

15.

Crlspy-one

stock has

a

requirecl

neturn

of

11

percent.

The

stock

currently

doesh5tfiiy a

.-

-,1

dlvldend

but lt

expects

to

begin

paying

a

dividend

of

P1.00

per

share

starting

five

years

from

l-

today

(Ds

=

P1.00).

Once established

the

dividend

is

expected

to

grow

by 25

percent per

expected

to

grow

at a

constant

rate

of

10

percent

ock

price

today?

6;-

-'

0,,

D?

Ds

l.x( I.so

l.1L

t"lz

15.

RiSa

Company has

been

growlng

at a 10

percent

rate, ancl it

just

pald

a diMdend

of

P3.00.

Due

to a

new

product,

RiSa

expects

tp

achleve a

dramatic

increase

in

its

short-run

gromh

rate, to

20

percent

annually for

the

next 2

years.

After this time,

growth

is

expected

to

CXve

t

5

r

ll.zrr

3.

rp'l

ts.l'7lY

= tl.z

.tg


9/11

t

t

vA|YJAL

frAfrActr

ME

NT ll

l.fu'oAthnb

re&m

to

the

long-run

oonstant

rate

of

10

percent.

The

company's

beta

ls 2.O

the

required

retum

on

an.average

stock

ls

11

percent,

and the

rlsk-free

rate

is

7

percent.

What

should

be

the dlvldend

yield

(Drlpo)today?

givg. u

g

?

'to|.

n

Ltg

1t>1.

* c-

t.

r.o

frn

'

tt'(

FGF

modelfor

valutng

5fdr"

r

=

lf.

+

a(rt -'r)

c

?

ls'|,

[fz

7,G

1s.w

Po

=9

r.rg

,

.1'4

F

J]1-

,

1s.7a

(t.rOz

( .rE).

=

S7

17.

An

analyst

is trylng

to

estimate

the

intrinsic

value

of the

stock

of

SMBC. The

analyst

estlmates

that

SMBC's free

cash

flow

during

the

next

year

rrvill

be

P25

million.

The analyst

also

estimates

that

the

company's

free

cash

flow will

increase

at a

constant

rate of

7

percent

a

year

and

that the

company's

WACC

is 10

percent,

SMBC has

P200 million of

long-

term

debt

and

preferred

stock,

and

30 mlllion

outstanding

shares

of common

stock.

what

ls

the

estlmated

per-share

price

of SMBC

common

stock?

,?.t.p

i4Y

@f:y

W

LTD

Hv

Pt

crr.?t\.y>\

brO@rgaa

FCF

modelfor

vatuing

stock

2l

'

fr

18'

Today

ls December

31, 2010. The

followlng

information

applies

to Addison

Airlines:

Aftor-tax,

operatlng income

[EBIT(I

-

T)] for

the

year

2011

is

expected

to be P400

nrlllion.

The company's

depreclation

expense

forthe

year

2011is

expected to be P80 miltion.

The company's

capital expendltures

for

the

year

2011

are expected

to

be

P160

million,

No change

is

expected

in

the company's

net

operating

rarorking

capital.

The

company's

free cash

flow

ls expected

to

grow

at

a constant

rate

of 5

percent

per

year.

The

company's

cost

of

equity is

14

percent.

The

company's

WACC is

10

percent.

The

current

market

value of the company's

debt

is P1.4

billion.

The

company

currently

has 125

mlllion

shares of stock

outstanding.

tking

the free

cash

flow

valuation

method, what should be the company's

stock

price

today?

cto

w-apg

(t'tv-

xu-)

trtv

-

po)

6Y

-

os\

:

6

out.

dr

sP

43.od.6to

,lo

-.01

;lv

-

-o{

tr{ooroooroocr

i

lLs,ooa.,,@

s*), 71,1 )

2lto2OQtrwc,

a

o

o

a

o

o

a

o

o

wFt

won-3

\

D=

r0

5\

\icl

uvI,

(,.r,,1

.[ia4

lj,Y

"

Div

r

Pa

Ul,

=

D

i,r2

Pr


10/11

a*9:

F-x

Ds.r

VlrL

--

P

\

@v ec >

VAC'L

_

v

,

relt

gq,9

/

NAIANCLAL

T,IAIVAG

tr,M E

NT

II

l.fug"gao' A,lvlanelo

return to

the long-run

constant

rate of 10

percent.

The

company's

beta ls 2.0,

the

required

return

on

an average stock

ls 11

percent,

and

the

risk-free

rate

is 7

percent.

What should

be

.

the

dlvldend

yleld

(Dr.,/Po)today?

givo.

w

I

grto|.-Lg5

ytl

.4

c-

l'

t.o

fm

.

tt'l-

FCF

model

for valutng

lfoir"'

r

2a@rw6

43.octgolto

.lo

-.ol

FCF

modelfor

valuing

stock

18, Today

ls

December

31,

2010.

Cype9.ba

*[email protected],

21. tl

The

following information applies to

Addison Airlines:

a

a

a

o

a

o

a

o

a

Aftor-tax, operatlng income

[EBIT(I

-

T)]

for the year

2011

is

expected

to

be

P400

mlllion.

The

company's depreclation expense for

the

year

2011 is expected

to

be

P80 million.

The

company's

capltal expenditures

for

the

year

2011

are

expected

to be

P160

million.

No

change

ls

expected

in

the

company's net

operating

urorking capital.

The

company's

free

cash

flow

ls

expected

to

grow

at a constant

rate

of 5

percent

per

year.

The

company's

cost

of

equity

is

14

percent,

The

company's

WACC is

10

percent.

The

crrrent

market

value

of the company's debt

is P1.4 billion.

The company

currently

has 125

mlllion

shares

of

stock

outstanding.

tlsing

the free

cash flow

valuation

method,

what

should

be

the company's

stock

price

today?

qo

FC,FI

W'ary+3

Ct'tY'

xrr)

Crtv

-

po)

t*V

-

osh

i

tf

o*.

sh

sP

Uron-3

;lct

-

-o{

tr{oorocoroocr

-'

l7/S,aoro@


11/11

.e. .-.ru

u v

lvHalbt

l, ,,

FCF

modelfor

valuing

stock

19, An analyst has collected

the

following information about VolVo

Electric:

o

Prolected

EBIT for the

next

year

P300

million.

o

Prolected

depreciation expense

for

the

next

year

P50

mllllon.

o

Projected

capital expenditures

for

the

next

year

P100

million.

o

Projected increase in

operating working capital

next

year

P50

millicn.

o

Tax

rate

40%.

o

WACC 10%.

o

Cost of equity

13%.

o

Market

value of

debt

and

preferred

stock

today

P500 million.

o

Nunrber of

shares

outstanding today

20

million.

The

company's

free

cash

flow

is

expected

to

grow

at a

constant

rate

of

6

percent

a

year.

The

analyst

uses

the

corporate value model

approach

to estimate

the

stoclCs

lntrlnslc

value. What

is

the

stocKs

lntrinsir

value

today?

YC'l

,

Lqo

oco

t

hoM

o@+socPreol..

,'lo-'ao

r

Eb,upraoa

rio

N4

.lo

-.oQ

I

1So

ooo

ooo.,,

h.-

( e-oo

@)

occ)

rbo

Ml

Welghtcd Aveqage Cost

of

Capital

(WACC)

20.

The

nrarket

value

of FlNman Company's

equity

is

P30

million,

and

the

market

value

of

it's

rlsk

free debt

P10

million.

lf

the

requirea

gtfflreturn

on

the

equity is

20%

and

that

on

debt

ls 8%,

calculate the FlNman's cost of .Liiiffif assume

no

taxes,

(b)

assume

35%

tax.

-

c*ett,

EGr

yr{rYrL

f

ffir

lL,

Sloek

Valt".

(P)

vhct

t

anst

'P

drbl

(fO)

r Do-

+

/,

(t-

tc^8"4.)

qo--

lotl

+,oirl

,

b.

$omctimcs

beirrg in

a

Kclation"hip

is liLc u

piridend-firowth

Mod.l.

\t{irst,

it

has

ir

$rpcr\ormal

(rowth

ratc

until

r".ching thc horizon

datc

whcn

f.onstant Growth

ratc

starts.

\zlore

so, thc.c are so c"lled

fositive

and

\egative

growth

ratc.

fhus,

(clationship

bc.or""

stror.rger with

fositivc

or

lncrcasing

ratc

whilc it

might cnd

with

\cgativc

or

p*.liningrale.

f-lo*cucr,

lil

capm stock valuation

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