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1、CHAPTER 18: EQUITY VALUATION MODELSPROBLEM SETS 1.Theoretically, dividend discount models can be used to value the stock of rapidly growing companies that do not currently pay dividends; in this scenario, we would be valuing expected dividends in the relatively more distant future. However, as a pra
2、ctical matter, such estimates of payments to be made in the more distant future are notoriously inaccurate, rendering dividend discount models problematic for valuation of such companies; free cash flow models are more likely to be appropriate. At the other extreme, one would be more likely to choos
3、e a dividend discount model to value a mature firm paying a relatively stable dividend.2.It is most important to use multistage dividend discount models when valuing companies with temporarily high growth rates. These companies tend to be companies in the early phases of their life cycles, when they
4、 have numerous opportunities for reinvestment, resulting in relatively rapid growth and relatively low dividends (or, in many cases, no dividends at all). As these firms mature, attractive investment opportunities are less numerous so that growth rates slow.3.The intrinsic value of a share of stock
5、is the individual investors assessment of the true worth of the stock. The market capitalization rate is the market consensus for the required rate of return for the stock. If the intrinsic value of the stock is equal to its price, then the market capitalization rate is equal to the expected rate of
6、 return. On the other hand, if the individual investor believes the stock is underpriced (i.e., intrinsic value price), then that investors expected rate of return is greater than the market capitalization rate.4.First estimate the amount of each of the next two dividends and the terminal value. The
7、 current value is the sum of the present value of these cash flows, discounted at 8.5%.5.The required return is 9%. 6.The Gordon DDM uses the dividend for period (t+1) which would be 1.05.7.The PVGO is $0.56:8.a.b.The price falls in response to the more pessimistic dividend forecast. The forecast fo
8、r current year earnings, however, is unchanged. Therefore, the P/E ratio falls. The lower P/E ratio is evidence of the diminished optimism concerning the firms growth prospects.9.a.g = ROE b = 16% 0.5 = 8%D1 = $2 (1 b) = $2 (1 0.5) = $1b.P3 = P0(1 + g)3 = $25(1.08)3 = $31.4910.a. b.Leading P0/E1 = $
9、10.60/$3.18 = 3.33Trailing P0/E0 = $10.60/$3.00 = 3.53c.The low P/E ratios and negative PVGO are due to a poor ROE (9%) that is less than the market capitalization rate (16%).d. Now, you revise b to 1/3, g to 1/3 9% = 3%, and D1 to:E0 (1 + g) (2/3)$3 1.03 (2/3) = $2.06Thus:V0 = $2.06/(0.16 0.03) = $
10、15.85V0 increases because the firm pays out more earnings instead of reinvesting a poor ROE. This information is not yet known to the rest of the market.11.a.b. The dividend payout ratio is 8/12 = 2/3, so the plowback ratio is b = 1/3. The implied value of ROE on future investments is found by solvi
11、ng:g = b ROE with g = 5% and b = 1/3 ROE = 15%c. Assuming ROE = k, price is equal to:Therefore, the market is paying $40 per share ($160 $120) for growth opportunities.12.a.k = D1/P0 + gD1 = 0.5 $2 = $1g = b ROE = 0.5 0.20 = 0.10Therefore: k = ($1/$10) + 0.10 = 0.20, or 20%b.Since k = ROE, the NPV o
12、f future investment opportunities is zero:c.Since k = ROE, the stock price would be unaffected by cutting the dividend and investing the additional earnings.13.a.k = rf + E(rM ) rf = 8% + 1.2(15% 8%) = 16.4%g = b ROE = 0.6 20% = 12%b.P1 = V1 = V0(1 + g) = $101.82 1.12 = $114.0414.Time:0156E t$10.000
13、$12.000$24.883$27.123D t$ 0.000$ 0.000$ 0.000$10.849b1.001.001.000.60g20.0%20.0%20.0%9.0%The year-6 earnings estimate is based on growth rate of 0.15 (1-.0.40) = 0.09. a.b. The price should rise by 15% per year until year 6: because there is no dividend, the entire return must be in capital gains.c.
14、The payout ratio would have no effect on intrinsic value because ROE = k.15.a.The solution is shown in the Excel spreadsheet below:b., c.Using the Excel spreadsheet, we find that the intrinsic values are $33.80 and $32.80, respectively.16.The solutions derived from Spreadsheet 18.2 are as follows:In
15、trinsic Value:FCFFIntrinsic Value:FCFEIntrinsic Value per Share: FCFFIntrinsic Value per Share: FCFEa.100,00075,12838.8941.74b.109,42281,79544.1245.44c.89,69366,01433.1636.6717.Time:0123D t$1.0000$1.2500$1.5625$1.953g25.0%25.0%25.0%5.0%a.The dividend to be paid at the end of year 3 is the first installment of a dividend stream that will increase indefinitely at the
