ter learning how to value a stock in his Corporate Finance class, Mark Stark decided to put his knowledge into practice and use the constant growth rate model to value El Tomate Feliz Co. He found that the company was severely undervalued. The stock was trading at $50 per share, but he valued it at $120 per share. Mark complained: “I thought that El Tomate Feliz was a steal and bought as many shares as I could, but the price didn’t go up. I have waited a year, and the price has not changed that much.” What could have gone wrong with Mark’s valuation? What can Mark do to mitigate pitfalls in valu
Q: 2. Procter and Gamble Corporation will pay an annual dividend of $0.65 one year from now. Analysts…
A: The dividend next year, D1 is $0.65 The growth rate is 12% till 5th year The constant growth rate is…
Q: 02: A $150000 real estate loan at 9% compounded monthly is repaid by monthly payments over 20 years.…
A: Amortization schedule refers to the statement showing the amount of payment made on each period…
Q: Estimating Intrinsic Share Value Using Dividend Discount Model Mattel, Inc. is expected to pay a…
A: We have; Cost of equity or required rate of return as 8% Amount of dividend is $1.44 for part-3, the…
Q: Q1/ The average price of gasoline in 2005 was $2.31 per gallon. In 1993, the average price was…
A: Given: Particulars Amount Price 2005 $2.31 Price 1993 $1.07 Years 12 Future price $5
Q: 4. A loan of 12 000 euros with an interest rate of 4,5 % a year is compounded semi-annually. If 260…
A: A loan is an agreement between two parties where one party forwards an amount to the other party on…
Q: Bros I want to retire in 20 years she deposits 1200 monthly into a retirement account earning 4.5%…
A: The formula you need is the formula for FV of an annuity, adjusted for the fact that payments are…
Q: Filer Manufacturing has 9,908,628 shares of common stock outstanding. The current share price is…
A: Market value basis is different from book value basis. In case of market value basis we look at the…
Q: The following shows beta for several companies. Calculate each stock’s expected rate of return using…
A: CAPM stands for the capital asset pricing model. It is an important model in finance that is used to…
Q: The market value of a home in Boston, MA. is $330,000. The assessment rate is 30%. What is the…
A: The market Value of Boston is $330,000 The assessment rate is 30% To Find: Assessed Value
Q: uppose a four period weighted average is being used to forecast demand. Weights for the periods are:…
A: Forecasting of demand is a method to know the customer demand for an existing product and a new…
Q: Assuming a 100% stock transaction with a 20% offer premium and the following facts: Current Stock…
A: We have a possible acquisition through a pure share swap. We have to find the EPS accretion /…
Q: 19. Consider the following two projects with a cost of capital of 15%. Only one can be chosen.…
A: Given Cost of Capital (r) = 15% Project A - Investment (I) = $550,000 Profit in first year =…
Q: Why is operating leverage important? Provide three reasons
A: Leverage in a simple sense refers to borrowing funds. A company borrows funds to increase its…
Q: Crenshaw Enterprises has gathered projected cash flows for two projects. Project 3 -$ 197,000 Year 0…
A: This is a case of capital budgeting. We will have to find the rate at which NPV of the two projects…
Q: Management of Ivanhoe, Inc., is considering switching to a new production technology. The cost the…
A: Given: Year Particulars Amount 0 Initial investment -$4,000,000 1 Cash inflow $0 2 Cash…
Q: The current price of Kinston Corporation stock is $10. In each of the next two years, this stock…
A: An option is a type of financial instrument that is based on the value of underlying securities,…
Q: Benford Inc. is planning to open a new sporting goods store in a suburban mall. Benford will lease…
A: Net annual cash flow The flow of cash into and out of a business is called cash flow. The difference…
Q: Kellogg Company manufactures cereal and other convenience food under its many well-known brands such…
A: Debt is sources of finance and it is cheaper sources of finance and also secured and safe sources of…
Q: Find the effective yield on a discount loan with the given discount rate r and the time. (Round your…
A: We have to find the effective yield on a discount loan.
Q: Choose the best answer Between equity and debt capital a.Equity is riskier than debt b.Debt is…
A: Choose the best answer Between equity and debt capital a.Equity is riskier than debt-Right…
Q: A stock price is currently $100. Over each of the next two 3-month periods, it will go up by 10% or…
A: Given Stock Price (S0) = $100 Risk Interest free rate (Rf) = 6%p.a compounded semi-annually Srike…
Q: Calculate the actual sales since the sales and sales tax rung up together; assume a 6% sales tax.…
A: Sales Excluding sales tax = Sales including sales tax / (1+Rate of Sales Tax)
Q: A lump sum amount of money that must be deposited now to provide a specified series of equal…
A: Annuity means a specified series of payments being made on regular basis. It can be Ordinary…
Q: Suppose Josh gets a $7500 gift from his family on graduation & wants to buy securities with this. He…
A: We have a margin position in long shares. We need to find the initial margin and the impact of…
Q: Jefferson Products Inc. is considering purchasing a new automatic press brake, which costs $320,000…
A: Honor Code: Since you have posted a question with multiple sub-parts, we will solve the first three…
Q: A5 A 12-year loan is repaid with annual payments at the end of each year. For the first four years,…
A: x 3X
Q: Suppose you made $59,065 of income from wages and $639 of taxable interest. You also made…
A: Select financials of an individual are given. We have to find the gross income.
Q: Determine how much is in the account on the basis of the indicated compounding after the specified…
A:
Q: The next two questions are based on the following information Consider the following prices in the…
A: The international fisher effect is used to refer to the relationship between the exchange rate and…
Q: What is the monthly payment on the refinance 3.625% mortgage? How much interest will they pay over…
A: Mortgages make house buying very easy because you can buy home home with only small amounts of…
Q: ohen’s Bowling Emporium has a degree of financial leverage of 2.0 and a degree of combined leverage…
A: Operating leverage shows how much there would be change in operating income with change in the sales…
Q: Sammie's Club wants to buy a 320,000-square-feet distribution facility on the northern edge of a…
A: Going-in capitalization rate/Direct Capitalization Method Projected first-year NOI divided by the…
Q: A firm is currently partially financed with zero-coupon debt that promises to repay bondholders $100…
A: We need to make a cash flow waterfall. We need to distribute the cash flows between the participants…
Q: Suppose that all stocks can be grouped into two mutually exclusive portfolios (with each stock…
A:
Q: Juliana invested $5000 in a fund at the beginning of every three months for five years. The fund was…
A: Future value refers to the current value of the investment at some future date affected by interest…
Q: What are the multiplier ways to calculate the cost of equity? Why are there multiply ways to…
A: There are multiple ways to calculate the cost of equity. We have to talk about them and see if they…
Q: entworth Industries is 100 percent equity financed. Its current beta is 1.1. The expected market…
A: WACC is weighted cost of equity and weighted cost of after tax cost of debt. This is cost of capital…
Q: Ralph’s Bow Works (RBW) is planning to add a new line of bow ties that will require the acquisition…
A: Cash flow refers to the statement showing the transactions related to cash inflows and outflows in a…
Q: 1. Suppose Acap Corporation will pay a dividend of $2.80 per share at the end of this year and $3…
A: Dividend for year 1(D1) = $2.80 Dividend for year 2(D2) = $3.00 Stock Price after 2 years(P2)…
Q: Which of the following might be used by a project manager for forecasting in a project such that…
A: Honor code: Since you have asked multiple questions, we will solve the first question for you. If…
Q: A 8-year bond with a face value of 1000 dollars earns interest at 9.9 percent convertible…
A: Price of bond is the present value of par value of bond and present value of the redemption value…
Q: expenses. What is their financi leverage at 40,000 items per year? What is their combined leverage?…
A: Given data SPT currently sells products at a price of $12 and has $ 5,000 interest expenses. In the…
Q: Consider three price scenarios applied to a share, priced $1,000, today - scenario 1 is when the…
A: Given: S0= $1000 Price one month from Now =$1000 ( Scenario 1) Price one month from Now =$1200 (…
Q: Please clearly write down how you get your answers, such as the variables you used to put in the…
A: This is a question based on bond pricing. You have specifically asked answer for Q - 4 and 5.
Q: Waller, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 20…
A: Particulars Values Par Value of Bond, FV $1,000.00 Coupon rate 5% Time to maturity 20 years…
Q: % Return on T-Bills, Stocks and Market Index State of the economy Probability T-Bills Phillips…
A: Correlation, an analytical metric, illustrates how the movements of several asset classes are…
Q: You sell a 55 call for 4. Stock ends at $61. Profit=..........
A: The strike price of the Call is 55 Call Premium is 4 The ending price is $61 To Find: Net profit
Q: A stock is expected to earn 10.0% over the next year with a 40% probability and 3.0% otherwise. What…
A: Market Condition Probability Return on A 1 40% 10% 2 60% 3% To Find: Standard Deviation
Q: Kat Receives 10,000 pesos monthly starting on March 2, 2023 until February 2, 2024 as a cash gift…
A: These are questions based on time value of money. We will use the standard time value of money…
Q: A Balanced Scorecards can have from 2 to 5 key performance indicators. O True O False
A: Key performance indicators help the company to effectively manage and guide its progress. The main…
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
- After learning how to value a stock in his Corporate Finance class, Mark Stark decided to put his knowledge into practice and use the constant growth rate model to value El Tomate Feliz Co. He found that the company was severely undervalued. The stock was trading at $50 per share, but he valued it at $120 per share. Mark complained: “I thought that El Tomate Feliz was a steal and bought as many shares as I could, but the price didn’t go up. I have waited a year, and the price has not changed that much.” Lower necessary rate of return - Mark would have estimated his cost of equity or required rate of return at lower levels, resulting in better intrinsic values as a result of the lower discount rate. What does this mean,” …Mark would have estimated his cost of equity or required rate of return at lower levels"You heard about a company that is producing a product that you really believe in. You think you can scrape together some money to buy a couple of shares when you get paid next. First, you would like to make sure that the price seems fair so you will calculate its value. Analysts estimate that the price of the stock is likely to be $82.7 in one year. It is a young company, so they do not pay dividends yet. You estimated that the fair return on the stock is 11.2%. What is your best guess at the fair value of the stock given this information? Answer:A few years ago, Mark learned the same valuation methods that we studied in this unit. He decided to put his knowledge in practice and used the constant growth dividend discount model to value one company. Mark concluded that the company was undervalued and bought shares of the company. After a while, the company’s price did not move toward the value he found. As a matter of fact, contrary to what he expected, the price of the company went down. He finally cried: Oh, If I only knew the true value of the company, I would not have lost money! Why do you think Mark’s valuation did not work out well? Explain.
- You have been asked by your employers to demonstrate your knowledge in business valuation process, by analyzing the value of Best Group Savings and Loans Company (BGSLC). The company paid a dividend of GH¢ 250,000 this year. The current return to shareholders of companies in the same industry as BGSLC is 12%, although it is expected that an additional risk premium of 2% will be applicable to BGSLC, being a smaller and unquoted company. Compute the expected valuation of BGSLC, if: The current level of dividend is expected to continue into the foreseeable future The dividend is expected to grow at a rate 4% par into foreseeable future The dividend is expected to grow at a 3% rate for three years and 2% afterwardsYour friend took a finance class and learned about risk/return tradeoff. Wanting a high return, he invested in a risky, start- up Technology Company. A year later, the company went bankrupt and he lost his entire investment. He became furious with his finance lecturer for misleading him, claiming he wastaught that higher return goes with higher risk. Explain how your friend misinterpreted the risk/return tradeoff concept?One fine day, you and your friend chit chat over at tea stall and your friend asked for an financial advice. We always argue that company that pays high dividend meaning that company is doing well. In fact, it is always not the case because some don't pay the dividend, instead they keep the money for future use. Is there is a perfect payout to fit the shareholders? Please consider a few considerations like the nature of the business, which industry, future growth and expansion plan, capital gain, and many others. Decribe it to your understanding.
- In a few sentences, answer the following question as completely as you can. Imagine you are the treasurer of a small manufacturing firm. Your firm is planning to go public (i.e., sell stock to investors for the first time). One unresolved question concerns the market’s required return on the stock. Given what you have learned, how do you think the required return will affect the market value of your firm’s stock? How would you go about estimating this rate?The company’s EBIT was $150 million last year and is not expected to grow. The firm is currently financed with all equity, and it has 20 million shares outstanding. When you took your corporate finance course, your instructor stated that most firm’s owners would be financially better off if the firms used some debt. When you suggested this to your new boss, he encouraged you to pursue the idea. As a first step, assume that you obtained from the firm’s investment banker the following estimated costs of debt for the firm at different capital structures: % Financed With Debt rd 0% --- 20 9.0% 30 9.5 40 11.0 55 13.0 If the company were to recapitalize, debt would be issued, and the funds received would be used to repurchase stock. Gary’s Guacamole is in the 25 percent state-plus-federal corporate tax bracket, its beta is 1.35 the risk-free rate is 5 percent, and the market risk premium is 8.5…David Lyons, CEO of Lyons Solar Technologies, is concerned about his firm’s level of debt financing. The company uses short-term debt to finance its temporary working capital needs, but it does not use any permanent (long-term) debt. Other solar technology companies have debt, and Mr. Lyons wonders why they use debt and what its effects are on stock prices. To gain some insights into the matter, he poses the following questions to you, his recently hired assistant: Who were Modigliani and Miller (MM), and what assumptions are embedded in the MM and Miller models?
- David Lyons, CEO of Lyons Solar Technologies, is concerned about his firms level of debt financing. The company uses short-term debt to finance its temporary working capital needs, but it does not use any permanent (long-term) debt. Other solar technology companies have debt, and Mr. Lyons wonders why they use debt and what its effects are on stock prices. To gain some insights into the matter, he poses the following questions to you, his recently hired assistant: e. Suppose the expected free cash flow for Year 1 is 250,000 but it is expected to grow faster than 7% during the next 3 years: FCF2 = 290,000 and FCF3 = 320,000, after which it will grow at a constant rate of 7%. The expected interest expense at Year 1 is 128,000, but it is expected to grow over the next couple of years before the capital structure becomes constant: Interest expense at Year 2 will be 152,000, at Year 3 it will be 192,000 and it will grow at 7% thereafter. What is the estimated horizon unlevered value of operations (i.e., the value at Year 3 immediately after the FCF at Year 3)? What is the current unlevered value of operations? What is the horizon value of the tax shield at Year 3? What is the current value of the tax shield? What is the current total value? The tax rate and unlevered cost of equity remain at 25% and 14%, respectively.After discussions with Josh, Carrington and Genevieve agree that they would like to try to increase the value of the company stock. Like many small business owners, they want to retain control of the company and do not want to sell stock to outside investors. They also feel that the company's debt is at a manageable level and do not want to borrow more money, What steps can they take to increase the price of the stock? Are there any condi- tions under which this strategy would not increase the stock price?The shareholder of Al-Karam wants to maximize his profits by selling his goods in the larger quantities. In order to achieve his target (s) he hired a manager to look after his business. However, the manager instead of maximizing business profits started maximizing his own interest by selling the designs in black to the competitor’s designers. Analyze the above situation and explain the possible problem that might occur for Al-Karam. If the wealth of the stockholder is decreasing ever since he hired the new manager, using EVA rule of thumb explain what would be the value of EVA and what is its economic interpretation.