3-1 Question 1
| Assignment 3-1, Question 1 | |||||||
| 1a. Calculate the value of the stock today: | |||||||
| 1. Calculate the PV of the dividends paid during the supernatural growth period: | |||||||
| $ | % | $ | |||||
| D1= | 1.15 | x | 1.15 | = | 1.3225 | ||
| D2= | x | = | |||||
| D3= | x | = | |||||
| PV of Dividends = | + | + | = | $ | |||
| 2. Find the PV of Turbo’s stock price at the end of Year 3: | |||||||
| P3^ = | ____D4____ | = | __ _D3(1+g)______ | ||||
| rs-g | rs-g | ||||||
| = | |||||||
| = | |||||||
| PV of P3^ = | = | $ | |||||
| 3. Sum the two components to find the value of the stock today: | |||||||
| Value of current stock (P0) = | $ | + | $ | = | $ | ||
| 1b. Calculate P1^ and P2^. | |||||||
| P1^ = | $ | + | $ | + | $ | = | $ |
| P2^ = | $ | + | $ | = | $ | ||
| 1c. Calculate the dividend yields and capital gains yield for Years 1, 2, and 3. | |||||||
| Year | Dividend Yield | + | Capital Gains Yield | = | Total Return | ||
| 1 | $1.3225/$25.23 ≈ 5.24% | + | ($26.93 – $25.23) / $25.23 ≈ 6.74% | ≈ | 12% | ||
| 2 | + | ≈ | |||||
| 3 | + | ≈ |
3-1 Question 2
| Assignment 3-1, Question 2 | ||
| rps | = | % |
3-1 Question 3
| Assignment 3-1, Question 3 | |||||
| 3a. Calculate McCaffrey’s value of operations. | |||||
| Vop = | FCF(1+g) | = | = | $ | |
| WACC – g | |||||
| 3b. Calculate the company’s total value. | |||||
| Total Value = | Value of Operations | + | Value of nonoperating assets | ||
| = | $ | + | $ | = | $ |
| 3c. Calculate the estimated value of common equity. | |||||
| Value of equity = | Total value | – | Value of debt | ||
| = | $ | – | $ | = | $ |
| 3d. Calculate the estimated per-share stock price. | |||||
| Price per share = | Value of Equity | ÷ | Number of Shares | ||
| = | $ | ÷ | $ | = | $ |
5-2 Question 1
| Assignment 5-2, Question 1 | |||||||||||
| a. | |||||||||||
| Net Present Value (NPV): | |||||||||||
| NPVx = | -$10,000 | + | $ | + | $ | + | $ | + | $ | = | $ |
| NPVy = | -$10,000 | + | $ | + | $ | + | $ | + | $ | = | $ |
| Internal Rate of Return (IRR): | |||||||||||
| To solve for each project’s IRR, find the discount rates that equate each NPV to zero: | |||||||||||
| IRRx | = | % | |||||||||
| IRRy | = | % | |||||||||
| Modified Internal Rate of Return (MIRR): | |||||||||||
| To obtain each project’s MIRR, begin by finding each project’s terminal value (TV) of cash inflows: | |||||||||||
| TVx | = | $6,500 (1.12)^3 | + | $ | + | $ | + | $1,000 | = | $ | |
| TVy | = | $ | + | $ | + | $ | + | $3,500 | = | $ | |
| Now, each project’s MIRR is the discount rate that equates the PV of the TV to each project’s cost, $10,000: | |||||||||||
| MIRRx | = | % | |||||||||
| MIRRy | = | % | |||||||||
| Profitability Index (PI): | |||||||||||
| To obtain each project’s PI, divide its present value of future cash flows by its initial cost. The PV of future cash flows can be found from the NPV calculated earlier: | |||||||||||
| PVx | = | NPVx | + | Cost of X | |||||||
| = | $ | + | $10,000 | = | $ | ||||||
| PVy | = | NPVy | + | Cost of Y | |||||||
| = | $ | + | $ | = | $ | ||||||
| PIx | = | PVx | ÷ | Cost of X | |||||||
| = | $ | ÷ | $ | = | |||||||
| PIy | = | PVy | ÷ | Cost of Y | |||||||
| = | $ | ÷ | $ | = |
