Homework Chapter 14 week 7 PROBLEM 6: Lauren Entertainment, Inc., has an 18 percent annual growth rate compared to the market rate of 8 percent. If the market multiple is 18, determine P/E ratios for Lauren Entertainment, Inc., assuming its beta is 1.0 and you feel t can maintain its superior growth rate for: a. The next 10 years b. The next 5 years PROBLEM 7: You are given the following information about two computer software firms and the S&P Industrials —————————-Company A——————-Company B————–S & P Industrials P/E Ratio 30.00 27.00 18.00 Expected annual growth rate 0.18 0.15 0.07 Dividend yield 0.00 0.01 0.02 a. Compute the growth duration of each company stock relative to the S & P Industrials. b. c. Given these growth durations, what determines your investment decision? Problem 8: The value of an asset is the present value of the expected returns from the asset during the holding period. An investment will provide a stream of returns during this period, and it is necessary to discount this stream of returns at an appropriate rate to determine the sets present value. A dividend valuation model such as the following is frequently used. Pi= D1 —————– (k i- gi) Where Pi = the current price of Common Stock i D1 = the expected dividend in period 1 Ki = the required rate of return on Stock i Gi = the expected constant-growth rate of dividends for Stock i a. Identify the three factors that must be estimated for any valuation model, and explain why these estimates are more difficult to derive for common stocks than for bonds. b. Explain the principal problem involved in using a dividend valuation model to value, (1) Companies whose operations are closely correlated with economic cycles. (2) Companies that are of very large and mature. (3) Companies that are quite small and are growing rapidly. Assume that all companies pay dividend. PROBLEM 10: The constant growth dividend discount model can be used both for the valuation of companies and for the estimation of the long-term term total return of a stock. Assume $ 20=Price of a Stock Today 8%= Expected Growth Rate of Dividend 0.60=Annual Dividend One Year Forward a. Using only the preceding data, compute the expected long-term total return on the stock using the constant-growth dividend discount model. c. Identify three alternative methods to the dividend discount model for the valuation of companies. PROBLEM 11: An analyst expects a risk-free return of 4.5 percent, a market of 14.5 percent, and the return for Stocks A and B that are show in Exhibit 14.24. EXHIBIT 14.24 STOCK INFORMATION STOCK BETA Analysts Estimated Return A 1.2 16% B 0.8 14% a. Show on a graph: (1) Where Stocks A and B would plot on the security market line (SML) if they were fairly value using the capital asset pricing model (CAMP). (2) Where Stocks A and B actually plot on the same graph according to the return estimated by the analyst and shown in Exhibit 14.24. b. State whether Stock A and B are undervalued if the analyst uses the SML for strategic investment decisions PROBLEM 12: Lauren Turk is reviewing Francesca Toys financial statements in order to estimate its sustainable growth rate. Using the information presented in Exhibit 14.25. a. (1) Identify and calculate the three components of the DuPont formula. (2) Calculate the ROE for 2011, using the three components of the DuPont formula. (3) Calculate the sustainable-growth rate for 2011Thank you very much for responding to the topics in such great details. This is the same type of analysis that I expect from a case study. Here, you have examined the information presented in the videos and have crafted responses based on the videos. And, you only included an outside source to support one of your points. If you complete the assignments in a similar manner, you will do well. I’m pointing this out so that others can use your responses as examples of how to respond to case study questions. …
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