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Question: he market consensus is that Analog Electronic Corporation has an ROE = 10% and a beta of 1.2. It plans to maintain indefinitely its traditional plowback ratio of 2/3. This year's earnings were $3 per share.

12 Oct 2022,2:23 PM

 

EXERCISE #1: The market consensus is that Analog Electronic Corporation has an ROE = 10% and a beta of 1.2. It plans to maintain indefinitely its traditional plowback ratio of 2/3. This year's earnings were $3 per share. The annual dividend was just paid. The consensus estimate of the coming year's market return is 14%, and T-bills currently offer a 6% return.

 

A. Use the CAPM to get the cost of equity: rE =

 

B. Using the plowback info, the current dividend: D0 =

 

C. The growth rate of dividends is: g =

 

D. Next year’s dividend is D1 =

 

E. The price of the stock is: P0 =

 

F. The current P0/E0 ratio is …………… and the forward P0/E1 ratio is …………………

 

G. The PVGO is P0 – E1 / rE =

 

EXERCISE #2: The following data is for the coming year. FinCorp's Net Income is reported as $195million. Depreciation Expense is $20million, accounts receivable decreased by $20 million, accounts payable decreased by $10 million, and inventories increased by $10 million. The firm's interest expense is $22million. Assume the tax rate is 35% and the net debt of the firm increases by $3million. What is the market value of equity if the FCFE is projected to grow at 3% indefinitely and the cost of equity is 11%?

 

FCFE1 =

 

EQ0 =

 

 

EXERCISE #3: Computer stocks currently provide an expected rate of return of 15%. MBI, a large computer company, will pay a year-end dividend of $2 per share. If the stock is selling at $50 per share, what must be the market's expectation of the growth rate of MBI dividends?

 

g=

 

EXERCISE #4: Eagle Products' EBIT is $300, its tax rate is 35%, depreciation is $20, capital expenditures are $70, and the planned increase in net working capital is $30. What is the free cash flow to the firm?

 

FCFF =

 

 

The FCFF will grow at 3%, WACC is 9%. What is the value of the company’s assets?

 

V =

Expert answer

 

Cost of Equity Using CAPM Rfr + Beta x (Mrr -Rfr)

 

Cost of Equity 10%
Analog Electronic Corporation    
     
ROE 10%  
β 1.2  
Plowback Ratio 0.666667  
EPS         3.00  
Market Return Rate (Mrr) 14%  
Return on T-Bills 6%  
     
     
Cost of Equity Using CAPM Rfr + Beta x (Mrr -Rfr)
Rfr 6%  
Beta 1.2  
Mrr 14%  
Mrr-Rfr 8%  
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