Stock Valuation Assignment

Simon Erick
29121289

P7-15

a. P0 = (CF0:r)
= $42500 : 0.18
= $236111

b. P0 = ( CF1 : ( r-g))
= ((42500 x 1.07) : (0.18 – 0.07)
= $ 413409.09

c.  Value of cash dividends and PV of annual dividends

t D0 1.12^t Dt I/(1.18)^t PV of Divident
1 $42,500 1.12 $47,600 0.848 $40,338.98
2 $42,500 1.2544 $53,312 0.718 $38,287.85
Total $78,626.83

PV of price of stock at end of initial growth period

D2+1 = $53312 x (1+0.07)
D3 = $57043.84

P2 = (D3 : (rs-g))
P2 = ($57043.84 ; ( 0.18 – 0.07)
P2 =$518580.36

PV Stock at the end of year 2

N= 2.1, I=18%, FV= $518580.36
PV = $451063.17

P7-16

Year Free Cash Flows Growth rate ra 7%

2015 $ 400,000.00 ROE 13% market required return of equity
2016 $ 300,000.00 -25.00% 0.5 market value of debt and equity ratio
2017 $ 550,000.00 83.30% holt has 1000000 shares of common stock outstanding
2018 $ 450,000.00 -18.20%
2019 $ 400,000.00 -11.10%
average growth rate 7.30%
a. FCF (2020-> inf) = (FCF2019 x (1+g) : (ra-g))
= $ 5714285.71

FCF 2019 = $6114285.71

Year Free Cash Flows (1+ra)^t PV of FCF
2015 $ 400,000.00 1.07 $ 373,831.78
2016 $ 300,000.00 1.145 $ 262,031.62
2017 $ 550,000.00 1.225 $ 448,963.83
2018 $ 450,000.00 1.311 $ 343,302.85
2019 $ 400,000.00 1.403 $ 4,359,401.21
vc= $ 5,787,531.28

b. Holt’s price
Vd = $1929177.09
Vp = ---
Vs = Vc-Vd-Vp
= $3858354.19
Vs/Share = $ 3.86 per share

c. Stock price next year

Vd = $1335584.14
Vp = ---
Vs = Vc-Vd-Vp
= $4451947.14
Vs/Share = $ 4.45 per share