100 Part One Value
bre44380_ch04_076-104.indd 100 09/30/15 12:46 PM
- Dividend discount model Company Z-prime is like Z in all respects save one: Its growth
will stop after year 4. In year 5 and afterward, it will pay out all earnings as dividends. What
is Z-prime’s stock price? Assume next year’s EPS is $15. - Dividend discount model If company Z (see Problem 5) were to distribute all its earnings,
it could maintain a level dividend stream of $15 a share. How much is the market actually
paying per share for growth opportunities? - Dividend discount model Consider three investors:
a. Mr. Single invests for one year.
b. Ms. Double invests for two years.
c. Mrs. Triple invests for three years.
Assume each invests in company Z (see Problem 5). Show that each expects to earn a rate of
return of 8% per year. - True/false True or false? Explain.
a. The value of a share equals the discounted stream of future earnings per share.
b. The value of a share equals the PV of earnings per share assuming the firm does not grow,
plus the NPV of future growth opportunities. - Free cash flow Under what conditions does r, a stock’s market capitalization rate, equal its
earnings–price ratio EPS 1 /P 0? - Free cash flow What do financial managers mean by “free cash flow”? How is free cash
flow calculated? Briefly explain. - Horizon value What is meant by the “horizon value” of a business? How can it be estimated?
- Horizon value Suppose the horizon date is set at a time when the firm will run out of
positive-NPV investment opportunities. How would you calculate the horizon value? (Hint:
What is the P/EPS ratio when PVGO = 0?)
INTERMEDIATE- Stock quotes and ratios Go to finance.yahoo.com and get trading quotes for IBM.
a. What is the latest IBM stock price and market cap?
b. What is IBM’s dividend payment and dividend yield?
c. What is IBM’s trailing P/E ratio?
d. Calculate IBM’s forward P/E ratio using the EPS forecasted by analysts for the next year.
e. What is IBM’s price–book (P/B) ratio? - Stock quotes and P/E ratios Look up Intel (INTC), Oracle (ORCL), and Hewlett Packard
(HPQ) on finance.yahoo.com. Rank the companies’ forward P/E ratios from highest to low-
est. What are the possible reasons for the different ratios? Which of these companies appears
to have the most valuable growth opportunities? - Valuation by comparables Look up P/E and P/B ratios for Entergy (ticker symbol ETR),
using Yahoo! Finance or another Internet source. Calculate the same ratios for the follow-
ing potential comparables: American Electric Power (AEP), CenterPoint Energy (CNP), and
Southern Company (SO). Set out the ratios in the same format as Table 4.1. Are the ratios
for these electric companies tightly grouped or scattered? If you didn’t know Entergy’s stock
price, would the comparables give a good estimate? - P/E ratios and the dividend discount model Look up General Mills (GIS), Kellogg (K),
Campbell Soup (CPB), and Seneca Foods (SENEA).
a. What are the current P/E and P/B ratios for these food companies? What are the dividend
and dividend yield for each company?