FinMan Unit 6 Tutorial Stock Valuation Revised Sep2021
Uploaded by
Debbie DebzFinMan Unit 6 Tutorial Stock Valuation Revised Sep2021
Uploaded by
Debbie DebzUniversity of Technology, Jamaica
FINANCIAL MANAGEMENT: FIN3001
UNIT 6: Stock Valuation
TUTORIAL QUESTIONS
1. V Energy Tech Ltd. has just had a very profitable year as rising energy costs have driven
a rapid increase in sales of its solar power cells. The firm also developed a new process
which has lowered its manufacturing costs significantly. V Energy Tech believes that
this new process will give it a major advantage over its competitors, which it estimates
will last for three years. V Energy Tech Ltd. expects to pay a dividend of $3.10 per share
next year, and that the dividend will grow at the same rate as its profits. High profits are
expected during this period, with the first three years of growth estimated to be 21%,
18% and 15% respectively, before returning to constant long term industry growth rate
of 5% per year. The firm’s cost of equity is 16%.
i. What is the firm’s share price today (P0)?
ii. What is the expected share price next year (P1)?
iii. Calculate the dividend yield for year 2.
iv. Calculate the current capital gains yield (year 1).
v. What is the expected share price at the end of year 2 (P2)?
vi. What is the expected share price at the end of year 3 (P3)?
2. Fletcher’s Company’s current stock price is $17, and its last dividend was $2.50. In
view of Fletcher’s strong financial position and its consequent low risk, its required rate
of return is only 17%. If dividends are expected to grow at a constant rate, g, in the
future, and if ks is expected to remain at 17%, what is Fletcher’s expected stock price 3
years from now?
3. What was the market price of the stock identified in the following table, at the end of
each of the last 4 years? What is the average growth rate of the stock price over this
period?
Tutorial Day Company
Monday Grace Kennedy Limited
Tuesday Caribbean Producers Jamaica Limited
Wednesday Lasco Manufacturing Limited
Thursday Seprod Limited
Friday Caribbean Cement Company Limited
Saturday Sagicor Real Estate X Fund Limited
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4. What is the difference between a stock’s price and its intrinsic value? When is market
equilibrium achieved?
5. TPPY investment in research and development has given it a technological and cost
advantage in manufacturing a previously difficult to make electronic component. The
firm is now experiencing rapid growth due to the advantages it now enjoys over its
competitors. It estimates growth rates of 12% next year, 10% in the following year and
9 % the year after that. It believes that its competitors would have improved their own
processes by the fourth year, at which time it expects its growth rates to decrease to a
constant rate of 4% thereafter. Its last dividend was $1.80 per share. Assume the cost of
equity is 15%.
i. What is the value of the stock today P0?
ii. What is the value of the stock one year from today P1?
iii. What is the value of the stock two years from today P2?
6. Markland Brothers recently paid a dividend of $3.08 per share. The dividend is expected
to grow at a constant rate of 2.5% per year. The required rate of return on the stock, ks, is
18%. What is the value per share of the company’s stock?
7. Stockland Inc is expected to pay a dividend of $2.57 per share next year. The dividend is
expected to grow at a constant rate of 3.2% per year. The required rate of return on the
stock, ks, is 17.8%. What is the value per share of the company’s stock?
8. Addy Stock currently sells for $22.50 a share and just paid a dividend of $2.25 a share.
The dividend is expected to grow at a constant rate of 6.5% a year.
a. What stock price is expected 3 years from now?
b. What is the stock’s dividend yield?
c. What is the stock’s capital gains yield?
d. What is the required rate of return on the company’s stock?
9. Fund Managers has preferred stock outstanding that pays dividends at a rate of 5.2%
annually. The par value of these shares is $90. What is the value of these preferred shares
if shareholders require a return of 9.8%?
10. What will be the nominal rate of return on a preferred stock with a $120 par value, a
stated dividend of 7.15% of par, and a current market price of (a) $65, (b) $85 and (c)
$105?
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11. CCC Fund has preferred stock outstanding with a par value of $90. The stock pays a
quarterly dividend of $4.50 and has a current price of $150.
a. What is the nominal rate of return on the preferred stock?
b. What is the effective rate of return?
12. You can purchase one share of Sumter Company common stock for $45 today. You
expect the price of the common stock to increase to $60 per share in one year. The
expected dividend at the end of year one is $2.80. What is your required rate of return
for Sumter stock?
13. You are considering the purchase of AMDEX Company stock. You anticipate that the
company will pay dividends of $2.25 per share next year and $2.75 per share at the end
of year two. You believe that you can sell the stock for $31.50 per share two years from
now. Your required rate of return is 15% per annum. What is the maximum price that
you would pay for a share of AMDEX Company stock today?
14. Access Fund recently paid a dividend, of $1.45. The company expects to have
supernormal growth of 15% for 3 years before the dividend is expected to grow at a
constant rate of 6%. The firm’s cost of equity is 19%.
a. Calculate the Terminal Value? What does this amount represent?
b. Which cash flows would you discount, and by how many years, to find the current
value of the stock?
c. Which cash flows would you discount, and by how many years, to find the expected
price of the stock after 1 year?
d. Which cash flows would you discount, and by how many years, to find the expected
price of the stock after 2 years?
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