Equity Valuation Problems

Problem 1 (stable growth)

Assume that you have a stock index trading at 700 and that the average dividend yield of the stocks in the index is 5%. Earnings and dividends can be expected to grow at 4% forever. The required return on equity is expected to be 10%. Required:

- Find the value of the index.

- Comment on the market. Is it overpriced, underpriced or fairly priced? Is there any apportunity for arbitrage?

Problem 2 (two-stage approach)

A large telecom corporation A paid dividends per share of 0.72 euro on earnings per share 1.25 euro in 2012. The EPS had grown at 13% over the period of 5 years but the growth rate is expected to decline linearly over the next 4 years to 5%, while the payout ratio remains unchanged. The required return on equity of A is 9%. The stock is trading at 33.40 euro at the time of analysis. Required:

a) Discuss the reasons for growth decline

b) Determine intrinsic value of the stock and comment on your results

Problem 3 (two stage, implied return)

The firm B paid $4 on common stock last year. The dividends are expected to grow at 6% annually during the next 3 years, then they will level off at 4% for the 5 years and then stop growing. Current price per share of the company B is $24. Find the required return (dividend yield). Can annuity formula help you in your calculations?

Problem 4 (two stage)

Your client is considering buying shares of Airpart Co., which is a manufacturer of spareparts for Airbus. Airpart reported earnings per share of $2.10 in 2012, on which it paid dividends per share of $0.69. Earnings are expected to grow 15% a year from 2013 to 2016, during which period the dividend payout ratio is expected to remain unchanged. After 2016 ROE remains unchanged but the payout ratio increases to 65% of earnings. Require return on equity is 20%.

a. If you client plans to sell Airpart shares at the end of 2015 what price may he/she expect to be?

b. How much would you pay for an Airpart share today (at the beginning of 2013)?

Problem 5 (cash flows)

In 2012 the corporation L had the following data: EBITDA $1,490 mln, Interest expense $315 mln, Depreciation and amortization expense $500 mln, Capital expenditure $650 mln, Net working capital is 6% of sales revenues, Sales revenues $15,500mln, 62 mln shares outstanding, marginal tax rate 40%, cost of capital 12%. According to the forecast revenues, earnings, capital expenditure and depreciation will grow at 8% for the next 5 years and thereafter the growth rate level off at 4%. Company plans to pay out half of its FCF as dividends in 2014. Find intrinsic value of equity.

Problem 6 (two stage, invent a story to fit the data)

The corporation G is a firm with strong brands and impressive track record on growth. Nevertheless it faces 2 problems. The first is the saturation of domestic market which represents a half of its revenues. The second is the increased competition from generic products across all of its product lines. It will continue to grow for 5 years. G has a reputation for paying high dividends and it has not accumulated large amounts of cash over the decade. Background information:

- EPS in 2011 $3.00

- Dividend per share in 2011 $1.37

- ROE in 2011 29.37%

- Required return on equity 10%

- when growth stabilizes ROE will decrease to 15% (industry average is 17.4%)

- the economy is growing at 5%

- the stock was trading at $63.90 at the time of analysis

Required:

- Explain the model which you will use to find intrinsic value of G equity

- What investment strategy are you willing to follow with G voting stock?

- Find:value of assets in place and value growth opportunities

Date: 2015-12-24; view: 1841