Hope Industries just paid a dividend of $2.00 per share

INSTRUCTIONS TO CANDIDATES

ANSWER ALL QUESTIONS

Question 1) Hope Industries just paid a dividend of $2.00 per share (i.e., D0 = $2.00). Analysts expect the company's dividend to grow 40 percent this year, and 20 percent in second year. After two years the dividend is expected to grow at a constant rate of 6 percent. The risk free rate is 4% and expected market risk premium is 6% and the firm is twice as risky as market. First calculate the current stock price using Excel. If the target price of the company's stock is $80.00, what should be the expected stable constant growth rate after two years? You must use “Goal Seek” command in Excel and show me the screen shot.

Question 2) ABC’s the most recent free cash flow (FCF0) is $100 million. The free cash flow is expected to grow at a rate of 30 percent, 20 percent, and 10 percent in each of the next three years. After three years, it is expected to grow forever at a constant rate of 5 percent. The cost of common stock (rs) is 15% and the weighted average cost of capital (WACC) is 10%. ABC currently has 100 million common shares of outstanding. Kay’s book value of debt and preferred stock is $50 million and $30 million respectively and the book values of debt and preferred stock are very close to market value of debt and preferred stock. ABC has $20 million marketable securities (beyond normal operation) and $ 10 million of minority investment in another company. Using Excel, calculate ABC’s stock price using FCF based valuation model and using “Two Way Data Table” of the Excel, show the sensitivity of the stock prices to the growth rate and the discount rate. (Use the stable growth rate from 2% to 8% in 1% increment and use a discount rate from 7% to 13% in 1% increment.)

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