Assume Evco Inc Has A Current Price Of 50 And Will Pay A 2 D

assume Evco Inc Has A Current Price Of 50 And Will Pay A 2 Divi

Assume Evco, Inc., has a current price of $50 and will pay a $2 dividend in one year, and its equity cost of capital is 15%. What price must you expect it to sell for right after paying the dividend in one year in order to justify its current price?

Krell Industries has a share price of $22 today. If Krell is expected to pay a dividend of $0.88 this year, and its stock 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?

NoGrowth Corporation currently pays a dividend of $2 per year, and it will continue to pay this dividend forever. What is the price per share if its equity cost of capital is 15% per year?

Summit Systems will pay a dividend of $1.50 this year. If you expect Summit’s dividend to grow by 6% per year, what is its price per share if its equity cost of capital is 11%?

Dorpac Corporation has a dividend yield of 1.5%. Dorpac’s equity cost of capital is 8%, and its dividends are expected to grow at a constant rate. a. What is the expected growth rate of Dorpac’s dividends? b. What is the expected growth rate of Dorpac’s share price?

Procter & Gamble will pay an annual dividend of $0.65 one year from now. Analysts expect this dividend to grow at 12% per year thereafter until the fifth year. After then, growth will level off at 2% per year. According to the dividend-discount model, what is the value of a share of Procter & Gamble stock if the firm’s equity cost of capital is 8%?

Heavy Metal Corporation is expected to generate the following free cash flows over the next five years: Year FCF ($ in millions). After then, the free cash flows are expected to grow at the industry average of 4% per year. Using the discounted free cash flow model and a weighted average cost of capital of 14%: a. Estimate the enterprise value of Heavy Metal. b. If Heavy Metal has no excess cash, debt of $300 million, and 40 million shares outstanding, estimate its share price.

Suppose Pepsico’s stock has a beta of 0.57. If the risk-free rate is 3% and the expected return of the market portfolio is 8%, what is Pepsico’s equity cost of capital?

Aluminum maker Alcoa has a beta of about 2.0, whereas Hormel Foods has a beta of 0.45. If the expected excess return of the market portfolio is 5%, which of these firms has a higher equity cost of capital, and how much higher is it?

Unida Systems has 40 million shares outstanding trading for $10 per share. In addition, Unida has $100 million in outstanding debt. Suppose Unida’s equity cost of capital is 15%, its debt cost of capital is 8%, and the corporate tax rate is 40%. a. What is Unida’s unlevered cost of capital? b. What is Unida’s after-tax debt cost of capital? c. What is Unida’s weighted average cost of capital?

Paper For Above instruction

In the realm of financial valuation, understanding the components that determine a company’s stock price is crucial. This paper explores the principles of dividend discount models (DDMs), capital asset pricing models (CAPM), and firm valuation techniques through a series of illustrative problems. The focus is on practical applications such as calculating expected stock prices, dividend yields, growth rates, and the impact of leverage on cost of capital.

Price Expectations Based on Dividend Discount Models

For Evco, Inc., with a current stock price of $50, a dividend payment of $2 in one year, and an equity cost of capital of 15%, the market expectation of the stock price immediately after dividend payment can be derived from the dividend discount model (DDM). The model posits that the current stock price is the present value of all expected future dividends and stock prices, which simplifies to:

P0 = D1 / (r - g)

Where P0 is the current price, D1 is the dividend in one year, r is the required rate of return (equity cost), and g is the growth rate of dividends or stock price. Since the problem asks for the stock price right after the dividend payout, we focus on the ex-dividend price, which is P1.

Assuming Evans’ stock price just after dividend payment is P1, then:

P0 = (D1 + P1) / (1 + r)

Rearranged, it becomes:

P1 = (P0 * (1 + r)) - D1

Plugging in values:

P1 = (50 * 1.15) - 2 = 57.5 - 2 = 55

Thus, the expected stock price immediately after paying the dividend in one year should be approximately $55 to justify its current trading price, under the assumptions of the model.

Dividend Yield and Cost of Capital Calculations

Krell Industries’ stock is priced at $22, with a projected dividend of $0.88, and a growth to $23.54 at year-end. The dividend yield is calculated as:

Dividend Yield = D1 / P0 = 0.88 / 22 ≈ 4%

And the expected return, incorporating capital gains, is:

Expected Total Return = (P1 - P0 + D1) / P0

Where P1 is $23.54, thus:

Return = (23.54 - 22 + 0.88) / 22 ≈ (1.54 + 0.88) / 22 ≈ 2.42 / 22 ≈ 11%

Therefore, Krell’s dividend yield is approximately 4%, and its equity cost of capital is around 11%.

Valuation with Constant and Growing Dividends

For NoGrowth Corporation, which pays a perpetual dividend of $2 and has a required return of 15%, the stock price is simply:

P = D / r = 2 / 0.15 ≈ $13.33

Summit Systems, with dividends growing at 6% and an equity cost of 11%, can be valued using the Gordon Growth Model:

P = D1 / (r - g) = 1.50 / (0.11 - 0.06) = 1.50 / 0.05 = $30

Dorpac’s dividend yield is 1.5%, and with an equity cost of 8%, the growth rate of dividends is found from the dividend yield formula:

Dividend Yield = D1 / P0 = 1.5% implies D1 / P0 = 0.015

Given the payout and cost of equity, the constant growth rate g is calculated as:

g = r - (D1 / P0) = 0.08 - 0.015 = 0.065 or 6.5%

This assumes that dividends grow at 6.5% annually.

Valuation with Multi-Stage Growth & Free Cash Flows

Procter & Gamble’s stock valuation involves estimating the present value of dividends with different growth phases. The dividend in year one is $0.65, growing at 12% annually until year five, after which growth stabilizes at 2%. The valuation entails calculating the present value of dividends during growth phases and the terminal value at the end of year five, discounted back at 8%. The process involves complex multi-stage discounted cash flow models.

Similarly, Heavy Metal Corporation’s enterprise value is estimated by projecting free cash flows (FCFs) over five years, then applying a perpetuity growth model for subsequent years at 4%, discounted at 14%. Subtracting net debt and dividing by shares outstanding yields the per-share valuation.

Risk and Leverage in Cost of Capital

The CAPM informs us that Pepsico’s equity cost of capital is:

Re = Rf + β (Rm - Rf) = 3% + 0.57(8% - 3%) = 3% + 0.57 * 5% = 3% + 2.85% = 5.85%

Regarding leverage effects, Alcoa’s higher beta indicates higher systematic risk; hence, its equity cost of capital exceeds Hormel’s by the margin derived from their respective betas and the market risk premium. The differences in beta demonstrate how firm-specific leverage and operational risk influence required returns.

Lastly, Unida Systems’ unlevered cost of capital, after-tax debt cost, and weighted average cost (WACC) are derived by standard formulas factoring in leverage and corporate taxes:

Unlevered Cost of Capital = (E/V)  Re + (D/V)  Rd * (1 - tax rate)

Where E and D are equity and debt portions of firm value, V is total enterprise value, and the tax shield effect is incorporated through (1 - tax rate).

In conclusion, these models provide insightful quantification of valuation metrics, emphasizing the importance of assumptions about growth, risk, and capital structure. Accurate valuation relies on integrating market expectations with fundamental data, and these tools serve as vital aids for investors and analysts aiming to determine intrinsic company value.

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