AFM273 Lecture Notes - Lecture 7: Valuation Using Multiples, Sensitivity Analysis, Comparables

45 views10 pages

amaranthporcupine288

10 Oct 2017

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM273

Professor

Kenneth R Vetzal

For unlimited access to Class Notes, a Class+ subscription is required.

Document Summary

If current stock price was less than p0, there is a positive npv investment and investors will buy the stock increasing the stock price. Increase divide pay out rate: decrease shares outstanding, with earnings a firm can, pay out to investors, retain and reinvest in firm. If firm chooses to keep its dividend payout rate constant, then the growth in dividends will equal growth of earnings: g = retention rate x return on investment. Depe(cid:374)d o(cid:374) p(cid:396)ofita(cid:271)ilit(cid:455) of fi(cid:396)(cid:373)"s i(cid:374)(cid:448)est(cid:373)e(cid:374)t: (cid:272)utti(cid:374)g the fi(cid:396)(cid:373)"s di(cid:448)ide(cid:374)d to i(cid:374)(cid:272)(cid:396)ease i(cid:374)(cid:448)est(cid:373)e(cid:374)t (cid:449)ill (cid:396)aise the sto(cid:272)k p(cid:396)i(cid:272)e if the (cid:374)e(cid:449) investments have a positive npv return on investment exceeds equity cost of capital. The discounted free cash flow model: discounted free cash flow model: starts by determining the total value of the firm to all investors (debt and equity, enterprise value = market value of equity + debt cash.

Related Questions

Assume all bonds in these problems are semi-annual bonds with $1000 par value 1. Calculate the yield to maturity for the following corporate bond

Company(Ticker) Coupon Maturity Last Price Merck (MRK) 4.375 April 15, 2031 98.211

2. US Treasury Strips are zero-coupon securities. Suppose you wish to purchase a US Treasury Strip that matures exactly 10 years from now. If the yield on 10-year US Treasury securities is currently 2.40%, what is the correct price quote for this bond? (Use semi- annual compounding).

3. A corporate bond has a coupon rate of 5.5% and a yield to maturity of 4.905%. You buy the bond when it is quoted at 102.10 percent of par. It has been 75 days since the last coupon payment was made. How much must you pay, per bond?

4. RJ Wagner Insurance Co. preferred stock pays a cash dividend of $2.00 per share, per year. The current price of this stock is $51.95. What is the yield on this preferred? Suppose an individual is considering investing in this preferred stock, versus a AAA-rated municipal bond that has a yield to maturity of 2.195%. Which has the higher after tax yield if the investor pays 45% of her income in state and federal income taxes, and the municipal bond interest is tax exempt?

5. Heavy Metal Corporation is expected to generate Free Cash Flow of $75 million in the current year. The free cash flow is expected to grow at a 3% rate forever. Heavy Metal has 20 million shares outstanding, $400 million in debt and no excess cash. The tax rate is 40%, the required return on equity is 12%, and the WACC (cost of capital) is 9%. Compute the Enterprise Value of Heavy Metal and the value of the equity per share.

6a) IBM Corp. earned $12.25 in EPS last year. IBM has recently adopted a long-term target to pay out 50% of all future earnings as dividends. IBMâs dividends and earnings are expected to grow at a constant rate of 3% in the future. You require a 9% rate of return on stock investments of similar risk. What is your estimate of the market value of IBM stock?

6b). Based on the information provided what is the implied return on new investment (ROE*) for IBM.

7. Bunge Corp. earned $9.75 per share and paid $3.25 in dividends in the year just ended. Bungeâs (trailing) P/E ratio is 15.0. If Bunge dividends are expected to grow at a 5% rate forever, what is the expected rate of return on Bunge stock?

8. Monsanto, Corp paid dividends of $8.80 last year. You develop the following forecast for Monsantoâs future dividends: growth of 20% for 2 years, growth of 10% in years 3, 4 and 5, and growth of 5% per year, forever, after year 5. If investors required return on Monsanto stock is 15%, what is the estimated market value according to the multi-stage dividend discount model?

cyanelk22

Question 25

1. What does the efficient market hypothesis require?

1. Financial markets to be competitive.

2. Prices to adjust rapidly.

3. Prices of undervalued securities to fall.

	a.	1 and 2.
	b.	1 and 3.
	c.	2 and 3.
	d.	All of these choices.

3 points

Question 26

1. Which of the following does the strong form of the efficient market hypothesis suggest?

1. Inside information will not lead to superior investment results.

2. Inside information will lead to superior investment results.

3. Studying financial statements will not lead to superior investment results.

4. Studying financial statements will lead to superior investment results.

	a.	1 and 3.
	b.	1 and 4.
	c.	2 and 3.
	d.	2 and 4.

3 points

Question 27

1. Which of the following is the least broad-based measure of stock prices?

	a.	NASDAQ market index.
	b.	Dow Jones industrial average.
	c.	S&P 500 stock index.
	d.	AMEX market value index.

3 points

Question 28

1. What is dollar-cost averaging?

	a.	Periodically buying a round lot of stock.
	b.	Periodically investing a specified dollar amount in a stock.
	c.	A means to increase the average cost basis.
	d.	A means to ensure a positive return.

2 points

Question 29

1. Stock dividends cause:

	a.	The price of a share of stock to rise.
	b.	The price of a share of stock to fall.
	c.	The value of the firm to rise.
	d.	The value of the firm to fall.

2 points

Question 30

1. Which of the following occurs when a stock has a two-for-one split?

	a.	The price of the stock doubles.
	b.	The firm's assets increase.
	c.	The firm's liabilities decrease.
	d.	The par value of the stock is reduced.

3 points

Question 31

1. Dividend reinvestment plans offer which of the following advantages?

1. Deferment of federal income taxes.

2. A convenient means to accumulate shares.

3. Dollar-cost averaging.

	a.	1 and 2.
	b.	1 and 3.
	c.	2 and 3.
	d.	2.

3 points

Question 32

1. When the Federal Reserve seeks to expand the money supply, it:

	a.	Sells securities.
	b.	Buy securities.
	c.	Runs a deficit.
	d.	Runs a surplus.

2 points

Question 33

1. The sum of cash, currency, and demand deposits is:

	a.	M1.
	b.	M2.
	c.	M3.
	d.	M4.

3 points

Question 34

1. If the Federal Reserve lowers the target federal funds rate:

	a.	The discount rate rises.
	b.	Liquidity in the banking system is increased.
	c.	Security prices fall.
	d.	Required reserves are also decreased.

3 points

Question 35

1. The anticipation of inflation suggests that the investor should:

	a.	Buy bonds.
	b.	Anticipate higher interest rates.
	c.	Avoid real estate investments.
	d.	Sell stocks of gold companies.

3 points

Question 36

1. The current ratio is unaffected by:

	a.	Using cash to pay a dividend.
	b.	The collection of an account receivable.
	c.	Selling inventory for a profit.
	d.	Selling bonds and using the funds to finance inventory.

2 points

Question 37

1. Which of the following are true as the debt ratio increases?

1. Fewer assets are debt financed.

2. More assets are debt financed.

3. The ratio of debt equity increases.

4. The ratio of debt equity decreases.

	a.	1 and 3.
	b.	1 and 4.
	c.	2 and 3.
	d.	2 and 4.

2 points

Question 38

1. The technical approach suggests that future stock prices are forecasted by:

	a.	Past stock rates.
	b.	Financial ratios.
	c.	Accounting statements.
	d.	Monetary policy.

2 points

Question 39

1. The Dogs of the Dow strategy:

	a.	Forecasts the direction of the Dow Jones averages.
	b.	Suggests buying the Dow stocks with the highest dividend yields.
	c.	Outperforms the S&P 500.
	d.	Suggests buying the lowest-priced Dow stocks.

3 points

Question 40

1. Behavioral finance combines aspects from which two fields in an attempt to identify human traits that affect investment decisions?

	a.	Accounting and finance.
	b.	Finance and psychology.
	c.	Physics and finance.
	d.	Finance and marketing.

cyanant553

17) Joe bought a share of stock for $47.50 that paid a dividend of $.92 and sold one year later for $51.38. What was Joe's dollar profit or loss and holding period return?
A) $3.88, 8.95% B) $4.60, 9.68% C) $4.8, 10.11% D) $0.72, 7.55%

18) Consider the following ten-year project. The initial after-tax outlay or after-tax cost is $1,000,000. The future after-tax cash inflows each year for years 1 through 10 are $400,000 per year. What is the payback period without discounting cash flows?
A) 0.5 years B) 10 years C) 2.5 years D) 5 years

19) Assume the following information about the market and JumpMasters' stock. JumpMasters' beta = 1.50, the risk-free rate is 3.50%, the market return is 10.0%. Using the SML, what is the expected return for JumpMasters' stock?
A) 18.50% B) 13.25% C) 7.50% D) 27.00%

20) Kip owns the following portfolio of securities. What is the beta for the portfolio?

Company Beta Percent of Portfolio
Apple .82 50%
Ford 2.93 30%
Federal Express 1.67 20%

A) 1.00 B) 1.74 C) 1.50 D) 1.62

21) Your investment banking firm has estimated what your new issue of bonds is likely to sell for under several
different economic conditions. What is the expected (average) selling price of each bond?

Recession Steady Boom
Probability .25 .65 .10
Bond price $970 $1,000 $1,450

A) $1,000.00 B) $1,007.50 C) $1,100.33 D) $1,037.50

22) Willie's Western Corp. has outstanding nonconvertible preferred stock (cumulative) that pays a quarterly
dividend of $1.65. If your required rate of return is 9.5%, what should you be willing to pay for 1000 shares of
Willie's Western?
A) $69,611.58 B) $62,621.58 C) $69,437.68 D) $52,631.58

23) Lincoln Industries Inc. is considering a project that has an initial after-tax outlay or after-tax cost of
$350,000. The respective future cash inflows from its five-year project for years 1 through 5 are $85,000 each
year. Lincoln expects an additional cash flow of $50,000 in the fifth year. The firm uses the net present value
method and has a discount rate of 10%. Will Lincoln accept the project?

A) Lincoln accepts the project because it has an NPV greater than $18,000.
B) Lincoln rejects the project because it has an NPV less than $0.
C) Lincoln accepts the project because it has an NPV greater than $3,000.
D) There is not enough information to make a decision.

lemonox733

AFM273 Lecture Notes - Lecture 7: Valuation Using Multiples, Sensitivity Analysis, Comparables

Document Summary

Get access

Related Documents

AFM273 Chapter : AFM 273 Textbook Notes & Economic Indicators (Some)

AFM273 Lecture Notes - Lecture 10: Business Cycle, Risk Premium, Capital Asset Pricing Model

AFM273 Chapter Notes - Chapter 12: Dow Jones Industrial Average, Market Capitalization, Capital Asset Pricing Model

Related Questions