Stock Valuation
1. Krell Industries has a share price of $22.00 today. If Krell is expected to pay a dividend of $0.88 this year and its share price is expected to grow to $23.54 at the end of the year what is Krell’s dividend yield and equity cost of capital?
2. Cooperton Mining just announced it will cut its dividend from $4 to $2.50 per share and use the extra funds to expand. Prior to the announcement, Cooperton’s dividends were expected to grow at a 3% rate, and its share price was $50. With the planned expansion, Cooperton’s dividends are expected to grow at a 5% rate. What share prices would you expect after the announcement? (Assume that the new expansion doesn’t change Cooperton’s risk.) Is the expansion a positive NPV investment?
3. Sora Industries has 60 million outstanding shares, $120 million in debt, $40 million in cash and the following projected free cash flow for the next 4 years.
Earnings and FCF forecast (in $millions)Year 0 / Year 1 / Year 2 / Year 3 / Year 4
1 / Growth / 8.10% / 10.30% / 6.00% / 5.00%
2 / Sales / 433 / 468.1 / 516.3 / 547.3 / 574.6
3 / Cost of Goods Sold / -313.3 / -345.7 / -366.5 / -384.8
4 / Gross Profit / 154.8 / 170.6 / 180.8 / 189.8
5 / Selling, General & Admin / -93.6 / -103.2 / -109.4 / -114.9
6 / Depreciation / -7 / -7.5 / -9 / -9.5
7 / EBIT / 54.2 / 59.9 / 62.4 / 65.4
8 / Less: Income tax at 30% / -16.3 / -18.0 / -18.7 / -19.6
9 / Plus: Depreciation / 7 / 7.5 / 9 / 9.5
10 / Less: Capital Expenditures / -7.7 / -10 / -9.9 / -10.4
11 / Less: Increases in NWC / -6.3 / -8.6 / -5.6 / -4.9
12 / Free Cash Flow / 30.9 / 30.6 / 37 / 39.8
Suppose Sora’s free cash flows are expected to grow at a 5% rate beyond year 4. If Sora’s WACC is 10%, what is the value of Sora’s shares based on this information?
4. Dell Computer has a share price of $27.85 and EPS of $1.26. Its competitor Hewlett-Packard has EPS of $2.47. Estimate the value of a Hewlett-Packard share.
5. Assume Coca-Cola Company has a share price of $43. The firm paid a dividend of $1.24 and you expect Coca-Cola to raise this dividend by approximately 7% per year in perpetuity. If Coca Cola’s equity cost of capital is 8%, what share price would you expect, based on your estimate of the dividend growth rate? Given Coca-Cola’s share price what would you conclude about your assessment of Coca-Cola’s future dividend growth?