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Group 4: Read chapter 5 of Valuation and do the examples

4. Newell Corporation, a manufacturer of do-it-yourself hardware and housewares, reported earnings per
share of $2.10 in 1993, on which it paid dividends per share of $0.69. Earnings are expected to grow 15% a
year from 1994 to 1998, during which period the dividend payout ratio is expected to remain unchanged.
After 1998, the earnings growth rate is expected to drop to a stable 6%, and the payout ratio is expected to
increase to 65% of earnings. The firm has a beta of 1.40 currently, and it is expected to have a beta of 1.10
after 1998. The treasury bond rate is 6.25%.
a. What is the expected price of the stock at the end of 1998?
b. What is the value of the stock, using the two-stage dividend discount model?



6. Medtronic Inc., the world's largest manufacturer of implantable biomedical devices, reported earnings per
share in 1993 of $3.95 and paid dividends per share of $0.68. Its earnings are expected to grow 16% from
1994 to 1998, but the growth rate is expected to decline each year after that to a stable growth rate of 6% in
2003. The payout ratio is expected to remain unchanged from 1994 to 1998, after which it will increase each
year to reach 60% in steady state. The stock is expected to have a beta of 1.25 from 1994 to 1998, after which
the beta will decline each year to reach 1.00 by the time the firm becomes stable (the treasury bond rate is
6.25%).
a. Assuming that the growth rate declines linearly (and the payout ratio increases linearly) from 1999 to 2003,
estimate the dividends per share each year from 1994 to 2003.
b. Estimate the expected price at the end of 2003.
c. Estimate the value per share, using the three-stage dividend discount model.



10. Biomet Inc., designs, manufactures, and markets reconstructive and trauma devices. It reported earnings
per share of $0.56 in 1993, on which it paid no dividends. It had revenues per share in 1993 of $2.91. It had
capital expenditures of $0.13 per share in 1993 and depreciation in the same year of $0.08 per share. The
working capital was 60% of revenues in 1993 and will remain at that level from 1994 to 1998, while earnings
and revenues are expected to grow 17% a year. The earnings growth rate is expected to decline linearly over
the following five years to a rate of 5% in 2003. During the high growth and transition periods, capital
spending and depreciation are expected to grow at the same rate as earnings, but they are expected to offset
each other when the firm reaches steady state. Working capital is expected to drop from 60% of revenues
during the 1994-1998 period to 30% of revenues after 2003. The firm has no debt currently, but it plans to
finance 10% of its net capital investment and working capital requirements with debt.
The stock is expected to have a beta of 1.45 for the high-growth period (1994-1998), and it is expected to
decline to 1.10 by the time the firm goes into steady state (in 2003). The treasury bond rate is 7%.
a. Estimate the value per share, using the FCFE model.
b. Estimate the value per share, assuming that working capital stays at 60% of revenues forever.
c. Estimate the value per share, assuming that the beta remains unchanged at 1.45 forever.