FIN 4504 Lecture Notes - Lecture 13: Dividend Discount Model, Dividend Payout Ratio, Dividend Yield

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18 Jul 2019

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Chapter 13 fin4504: book value- net worth of common equity according to a firm"s balance sheet. Book value doesn"t consider economic value of the firm (growth potential) They are recorded at the purchase price, don"t reflect market value today. Should not be very much different than 1. If > 1, market value is more than replacement cost. Intrinsic value of the firm is present value of the firm. Without it you cannot calculate hpr: expected holding period return. Intrinsic value- present value of firm"s expected future net cash flows discounted by required rate of return. 13. 3 dividend discount models: constant-growth ddm- form of ddm that assumes dividends will grow at constant rate. Growth rate must be higher than rate of return. Lower market capitalization rate, k: for stock with market price = intrinsic value, expected holding period return. Dividend yield and capital gains yield: net income: dividends and change in retained earnings. Need to know what fraction goes to each.

Related Questions

_____________ is the difference between the market value of the firm (i.e., the sum of the market value of common equity, the market value of debt, and the market value of preferred stock) and the book value of the firmâs common equity, debt, and preferred stock. ______________ represents the residual income that remains after the cost of all capital, including equity capital, has been deducted.

_______________ is the profit from the sale of a capital asset for more (less) than its purchase price. ____________ can be carried backward for 2 years or forward for 20 years to offset taxable income in a given year.

__________________ is the amount of interest bearing debt, preferred stock, and common equity used to acquire the companyâs net operating assets. Without this capital a firm cannot exist, as there is no source of funds with which to finance operations.

_______________ is the amount of net income a company would generate if it had no debt and held no financial assets. So it is a better measure of the performance of a companyâs operations because debt lowers income.

19. _____________ and ________ ___ are two important types of derivatives, and their values depend on the prices of other assets.

20. The four most fundamental factors affecting the cost of money are ___________________, _______________ for consumption, _____________, and _______________.

21. Corporations that own less than 20% of the stock of the dividend paying company can exclude 70% of the dividends received; firm that own more than ____________% but less than ___________% can exclude _________% of the dividends; and firms that own more than _____________% can exclude the entire dividend payment.

Please do 2 & 3. I have the answer correct listed for 1 for reference, if needed.

Capital Structure Theory Problem 15-8 Capital Structure Analysis

The Rivoli Company has no debt outstanding, and its financial position is given by the following data:

Assets (Market value = book value) $3,000,000

EBIT $500,000

Cost of equity, rs 10%

Stock price, Po $15

Shares outstanding, no 200,000

Tax rate, T (federal-plus-state) 40%

The firm is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 30% debt based on market values, its cost of equity, rs, will increase to 13% to reflect the increased risk. Bonds can be sold at a cost, rd, of 8%. Rivoli is a no-growth firm. Hence, all its earnings are paid out as dividends. Earnings are expected to be constant over time.

What effect would this use of leverage have on the value of the firm?

1) What would be the price of Rivoli's stock? Round your answer to the nearest cent. CORRECT ANSWER= $14.11 PER SHARE

2) What happens to the firm's earnings per share after the recapitalization? Round your answer to the nearest cent. The firm INCREASED its EPS by $ ______. (?)

3) The $500,000 EBIT given previously is actually the expected value from the following probability distribution:

Probability	EBIT
.10	$115,000
.20	$200,000
.40	$400,000
.20	$850,000
.10	$1,415,000

Determine the times-interest-earned ratio for each probability. Round your answers to two decimal places.

Probability	TIE
.10	?
.20	?
.40	?
.20	?
.10	?

What is the probability of not covering the interest payment at the 30 percent debt level? Round your answer to two decimal places. %.

49) Next year's earnings are estimated to be $3. The company plans to reinvest 20% of its earnings at 15%. If the cost of equity is 7%, what is the present value of growth opportunities?

a. $18.14 b. $16.14 c. $7.07 d. $17.14

34) Tri-coat Paints has a current market value of $42 per share with earnings of $4.98. What is the present value of its growth opportunities (PVGO) if the required return is 12%? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

PVGO

26) A 1-year gold futures contract is selling for $1,645. Spot gold prices are $1,592 and the 1-year risk-free rate is 3%.

a. Based on the above data, which of the following set of transactions will yield positive riskless arbitrage profits?

a. Buy gold spot with borrowed money, and buy the futures contract. b. Buy the futures contract, and buy the gold spot using borrowed money.

c. Buy the futures contract, and sell the gold spot and invest the money earned. d. Buy gold in the spot with borrowed money, and sell the futures contract.

17) You want to earn a return of 11% on each of two stocks, A and B. Stock A is expected to pay a dividend of $3 in the upcoming year, while stock B is expected to pay a dividend of $2 in the upcoming year. The expected growth rate of dividends for both stocks is 4%. Using the constant-growth DDM, the intrinsic value of stock A _________.

a. will be higher than the intrinsic value of stock B b. The answer cannot be determined from the information given.

c. will be less than the intrinsic value of stock B d. will be the same as the intrinsic value of stock B

19) Today's futures markets are dominated by trading in _______ contracts.

a. metals b. agriculture c. commodity d.financial

22) The stock of Nogro Corporation is currently selling for $10 per share. Earnings per share in the coming year are expected to be $3. The company has a policy of paying out 50% of its earnings each year in dividends. The rest is retained and invested in projects that earn a 30% rate of return per year. This situation is expected to continue indefinitely.

Assuming the current market price of the stock reflects its intrinsic value as computed using the constant-growth DDM, what rate of return do Nogroâs investors require? (Do not round intermediate calculations.)

Rate of return

By how much does its value exceed what it would be if all earnings were paid as dividends and nothing were reinvested?

PVGO

c-1.

If Nogro were to cut its dividend payout ratio to 25%, what would happen to its stock price?

	a. Stock price would be increased
	b. Stock price would be unaffected
	c. Stock price would be decreased

c-2.

If Nogro eliminated the dividend, what would happen to its stock price?

	a. Stock price would be decreased
	b. Stock price would be unaffected
	c. Stock price would be increased

FIN 4504 Lecture Notes - Lecture 13: Dividend Discount Model, Dividend Payout Ratio, Dividend Yield

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