CFGB6102 Corporate Finance
Stock Valuation
1.A firm’s common stock currently sells for $75 per share. The firm has total assets of $1,000,000 and total liabilities, including preferred stock, of $350,000. If the firm has 10,000 shares of common stock outstanding, (a)what is the book value of each share of common stock?

(b)is the stock overvalued or undervalued in the marketplace? (c)what might be the reason(s) for your answer in (b).
(a)
(b)overvalued
(c)market value of the assets is greater than the book value. 2.A firm has current assets of $800,000, which can be liquidated at 90 percent of book value. Total liabilities, including preferred stock, equal $270,000. The firm has 15,000 shares of common stock outstanding. What is the liquidation value per share of common stock?

3.Antique Replicas, Inc., has a beta of 1.40, the annual risk free rate of interest is currently 10 percent, and the required return on the market portfolio is 16 percent. The firm estimates that its future dividends will continue to increase at an annual compound rate consistent with that experienced over the 2000–2003 period. YearDividend

2000$2.70
20012.95
20023.25
20033.40
(a) Estimate the value of Antique Replicas, Inc., stock.
(b) A lawsuit has been filed against the company by a competitor, and the potential loss has increased risk, which is reflected in the company’s beta, increasing it to 1.6. What is the estimated price of the stock following the filing of the lawsuit. (a)ks 0.10 1.4(0.16 – 0.10) 0.184

growth rate of dividends $3.40/$2.70 1.259 FVIF3, k 8%
Po $3.40(1.08)/(0.184 – 0.08) $35.31
(b)ks 0.10 1.6(0.16 – 0.10) 0.196
Po $3.40(1.08)/(0.196 – 0.08) $31.66
4.Tangshan China’s stock is currently selling for $160.00 per share and the firm’s dividends are expected to grow at 5 percent indefinitely. In addition, Tangshan China’s most recent dividend was $5.50. The expected risk free rate of return is 3 percent,...

...on the Nasdaq Stock Exchange.
As the chief financial officer of a young company with lots of investment opportunities, Eco’s CFO closely monitor the firm’s cost of capital. The CFO keeps tabs on each of the individual costs of Eco’s three main financing sources: long-term debt, preferred stock, and commonstock. The target capital structure for Eco is given by the weights in the following table:
Source of capital Weight
Long-term debt 30%
Preferred stock 20%
Commonstock equity 50%
Total 100%
At the present time, Eco can raise debt by selling 20-year bonds with a $1,000 par value and a 10.5% annual coupon interest rate. Eco’s corporate tax rate is 40%, and its bonds generally require an average discount of $45 per bond and floatation costs of $32 per bond when being sold. Eco’s outstanding preferred stocks a 9% dividend and has a $95-per share par value. The cost of issuing and selling additional preferred stock is expected to be $7 per share. Because Eco is a young firm that requires lots of cash to grow it does not currently pay a dividend to commonstock holders. To track the cost of commonstock the CFO uses the capital asset pricing model (CAPM). The CFO and the firm’s investment advisors believe that the appropriate risk-free rate is 4% and...

...Midterm Study Guide – FISV6056
Professor Tim Howes
Fall 2012
1. Definition of investment:
A current commitment of $ for a period of time in order to derive future payments that will compensate for:
The time the funds are committed
The expected rate of inflation
Uncertainty of future flow of funds
2. Geometric vs. arithmetic – understand and be able to calculate difference between the two.
HPR (Holding Period Return) =
HPY (Holding Period Yield) = HPR – 1
GM = * = the product of all the annual HPRs
AM = /n * = the sum of all the annual HPYs
3. The basic trade-off in the investment process is: between the anticipated rate of return for a given investment instrument and its degree of risk.
4. The larger the variance of returns, everything else remaining constant, the greater the dispersion of expectations and the higher the risk.
5. The nominal risk free rate of interest is a function of: the real risk free rate and the rate of inflation.
6. The ability to sell an asset quickly at a fair price is associated with: Liquidity risk
7. What will happen to the security market line (SML) if the following events occur, other things constant: (1) inflation expectations increase, and (2) investors become more risk averse?
Shift up and have a steeper slope
8. Modern portfolio theory assumes that most investors are risk: Risk averse
The commonstock of XMen Inc. had...

...Starter would have invested just Rs. 200,000 and seen your investment grow to ~Rs. 3.4 million, and seen a return of 16x. Someone like me who woke up later, will have invested a not inconsiderable Rs. 1.2 miliion, but seen only a 3x return!
Wished I could start the game all over again? You bet, I did! Understood perfectly this aspect of time value of money or what is also called the power of compounding. The longer your money remains invested, the better it works for You! Why Invest, became a no-brainer.
By now my mind had started ticking! Hey wait, what if I could make my money work just a bit faster?
Compounding at different rates
It appeared to me now hey, there are other financial instruments too. If I can make my own money work just a bit harder and faster, perhaps I could play catch up? Lets see how the figures stack up.
Now this was getting interesting. Compounding at just 2 percent more per year every year for next 20 years made for a sizeable 44 percent difference in overall returns. And over 40 years the 2 percent difference more than doubled the returns! Why Invest, indeed!
Now I had learnt my math in school, and knew this is due to the power of compounding! But had I ever worked figures through like this? The miracle of the power of compounding ensures that our investment makes money and the return on that investment makes some more money - keep it that way for a number of years and our...

...29)
All of the following features may be characteristic of preferred stock EXCEPT
A)
callable.
B)
no maturity date.
C)
tax-deductible dividends.
D)
convertible.
Answer: c
If a firm has class A and class B commonstock outstanding, it means that
A)
each class receives a different dividend.
B)
the par value of each class is different.
C)
the dividend paid to one of the classes is tax deductible by the corporation.
D)
one of the classes is probably non-voting stock.
Answer:
D
33)
Julian is considering purchasing the stock of Pepsi Cola because he really loves the taste of Pepsi. What should Julian be willing to pay for Pepsi today if it is expected to pay a $2 dividend in one year and he expects dividends to growth at 5 percent indefinitely? Julian requires a 12 percent return to make this investment.
A)
$28.57
B)
$29.33
C)
$31.43
D)
$43.14
Answer:
A
Nico Custom Cycles' commonstock currently pays no dividends. The company plans to begin paying dividends beginning 3 years from today. The first dividend will be $3.00 and dividends will grow at 5 percent per year thereafter. Given a required return of 15 percent, what would you pay for the stock today?
A)...

...ROLE AND PURPOSE This subject aims to introduce to students a range of basic concepts and ideas in modern finance. After completing this subject, participants should know the principles involved in making investment and financing decisions, understand functions of financial markets and financial managers, and possess basic knowledge of option pricing and financial planning. This foundation course prepares students for more in‐depth studies at a later stage. LEARNING OUTCOMES Upon completion of the subject, students will be able to: a. Understand the role of financial managers and the functions of the financial market; b. Understand the concept of present value and its applications in investment appraisal; c. Understand the risk‐return relation and the determination of cost of capital; d. Possess broad knowledge of financing decision‐making under uncertainty and conditions of market imperfection; e. Apply basic finance theory to solve practical problems. ASSESSMENT METHODS
Specific assessment methods/tasks Continuous Assessment 1. Written Assignment (15%) and Tutorial Participation (5%) 2. Midterm Test Final Examination Total % weighting 50% 20% 30% 50% 100 % √ √ √ √ √ √ √ √ √ √ √ √ √ Intended subject learning outcomes to be assessed a b c d e
Note that under the Double-D policy, students have to obtain at least a “D” in both continuous assessment and final examination in order to pass the course. 1
WRITTEN...

...Valuation of CommonStock
Ashok Banerjee
Common (Equity) Stocks
• Because commonstock never matures, today’s
value is the present value of an infinite stream of
cash flows (i.e., dividend).
• But dividends are not fixed.
• Not knowing the amount of the dividends—or
even if there will be future dividends— makes it
difficult to determine the value of commonstock.
• So what are we to do?
Valuation Models
• Dividend Valuation Model (DVM):
– Constant dividend: Let D be the constant
DPS:
The required rate of return (re) is the return shareholders
demand to compensate them for the time value of money tied
up in their investment and the uncertainty of the future cash
flows from these investments.
Valuation Models
• Dividend growth at a constant rate (g):
(also known as Gordon Model)
OR
OR
Exercise 1
• You buy a stock for Rs.230 and you
expect the next year’s dividend to be
Rs.12.42. Furthermore, you expect the
dividend to grow at a constant rate of 8%
p.a.
– What is the expected return of the stock?
– What is the dividend yield?
– What is the expected price of the stock in five
years?
Dividend and Earnings Growth
• Growth in dividends occurs primarily as a result
of growth in EPS.
• Growth in earnings, in turn, results from a
number of factors, including (1) inflation, (2)
retention...

...CommonStock Valuation
Chapter 10
Fundamental Analysis Approaches
Present value approach
1 Capitalization of expected income
2 Intrinsic value based on the discounted value of the expected stream of cash flows
Multiple of earnings (P/E) approach
• Stock worth some multiple of its future earnings
Present Value Approach (Capitalization of Income)
Intrinsic value of a security is
[pic]
Ke = appropriate discount rate
In using model, to estimate the intrinsic value of the security must:
2 Discount rate (Capitalization Rate, Required Rate of Return)
1 Required rate of return: minimum expected rate to induce purchase given the level of risk
2 The opportunity cost of dollars used for investment
3 Expected cash flows and timing of cash flows
1 Stream of dividends or other cash payouts over the life of the investment
2 Dividends paid out of earnings and received by investors
1 Earnings important in valuing stocks
3 Retained earnings enhance future earnings and ultimately dividends
1 If use dividends in PV analysis, don’t use retained earnings in the model
• Retained earnings imply growth and future dividends
• Compared computed price to...

...University of Bristol - School of Economics, Finance and Management QUANTITATIVE METHODS FOR FINANCE AND INVESTMENT (EFIMM005) Review Questions Question 1: Concepts a. Deﬁne a stochastic process. Give an example in Finance of a quantity that can be modelled as a stochastic process. b. Deﬁne a stationary stochastic process. c. Consider a stochastic process {Yt , t = 1, .., T }. Deﬁne the partial autocorrelation function (pacf) associated to this process. d. Explain the diﬀerence between estimator and estimate. e. Let {Ut , t = 1, .., T } be a mean zero white noise process. What is the value of pacf at lag 2 for the process Yt = .5Yt−1 + Ut ? f. Explain the diﬀerence between the autocovariance function and the sample autocovariance function.
Question 2: Application The capital asset pricing model (CAPM) can be written as E(Rjt |Rmt , Rf t ) = Rf t + βj (Rmt − Rf t ), where Rjt is the net return of security j at period t, Rmt is the return on a market portfolio proxy, and Rf t is the return on a risk-free proxy. The coeﬃcient βj is the CAPM beta for security j. Suppose that you have estimated βj by ordinary least squares and found that the estimated value was 1.37 with standard deviation 2.6. based on 3665 observations. a. A city analyst has told you that security j closely follows the market, in the sense that security j is equally risky, on average, to the market portfolio. Perform a 5% signiﬁcance level test of...

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