Stock Valuation
1. Krell Industries has a share price of $22.00 today. If Krell is expected to pay a dividend of $0.88
this year and its share price is expected to grow to $23.54 at the end of the year what is Krell’s
dividend yield and equity cost of capital?
2. Cooperton Mining just announced it will cut its dividend from $4 to $2.50 per share and use the
extra funds to expand. Prior to the announcement, Cooperton’s dividends were expected to
grow at a 3% rate, and its share price was $50. With the planned expansion, Cooperton’s
dividends are expected to grow at a 5% rate. What share prices would you expect after the
announcement? (Assume that the new expansion doesn’t change Cooperton’s risk.) Is the
expansion a positive NPV investment?
3. Sora Industries has 60 million outstanding shares, $120 million in debt, $40 million in cash and
the following projected free cash flow for the next 4 years.
1
2
3
4
5
6
7
8
9
10
11
12
Earnings and FCF forecast (in $millions)
Year 0
Year 1
Year 2
Growth
8.10%
10.30%
Sales
433
468.1
516.3
Cost of Goods Sold
-313.3
-345.7
Gross Profit
154.8
170.6
Selling, General & Admin
-93.6
-103.2
Depreciation
-7
-7.5
EBIT
54.2
59.9
Less: Income tax at 30%
-16.3
-18.0
Plus: Depreciation
7
7.5
Less: Capital Expenditures
-7.7
-10
Less: Increases in NWC
-6.3
-8.6
Free Cash Flow
30.9
30.6
Year 3
6.00%
547.3
-366.5
180.8
-109.4
-9
62.4
-18.7
9
-9.9
-5.6
37
Year 4
5.00%
574.6
-384.8
189.8
-114.9
-9.5
65.4
-19.6
9.5
-10.4
-4.9
39.8
Suppose Sora’s free cash flows are expected to grow at a 5% rate beyond year 4. If Sora’s WACC
is 10%, what is the value of Sora’s shares based on this information?
4. Dell Computer has a share price of $27.85 and EPS of $1.26. Its competitor Hewlett-Packard has
EPS of $2.47. Estimate the value of a Hewlett-Packard share.
5. Assume Coca-Cola Company has a share price of $43. The firm paid a dividend of $1.24 and you
expect Coca-Cola to raise this dividend by approximately 7% per year in perpetuity. If Coca
Cola’s equity cost of capital is 8%, what share price would you expect, based on your estimate of
the dividend growth rate? Given Coca-Cola’s share price what would you conclude about your
assessment of Coca-Cola’s future dividend growth?