Chapter 91 Fletcher Company's Current Stock Price Is 36.00

Chapter 91 Fletcher Companys Current Stock Price Is 3600 Its Last

Fletcher Company's current stock price is $36.00, its last dividend was $2.40, and its required rate of return is 12%. If dividends are expected to grow at a constant rate, g, in the future and if rs is expected to remain at 12%, what is Fletcher's expected stock price 5 years from now?

Snyder Computers Inc. is experiencing rapid growth. Earnings and dividends are expected to grow at a rate of 15% during the next 2 years, at 13% the following year, and at a constant rate of 6% during Year 4 and thereafter. Its last dividend was $1.25, and its required rate of return is 12%. a. Calculate the value of the stock today. b. Calculate and c. Calculate the dividend and capital gains yields for Years 1, 2, and 3.

Smith Technologies is expected to generate $150 million in free cash flow next year, and FCF is expected to grow at a constant rate of 5% per year indefinitely. Smith has no debt or preferred stock, and its WACC is 12%. If Smith has 50 million shares of stock outstanding, what is the stock's value per share?

Ezzell Corporation issued perpetual preferred stock with a 15% annual dividend. The stock currently yields 8%, and its par value is $100. a. What is the stock's value? b. Suppose interest rates rise and pull the preferred stock's yield up to 12%. What is its new market value?

Martell Mining Company's ore reserves are being depleted, so its sales are falling. Also, because its pit is getting deeper each year, its costs are rising. As a result, the company's earnings and dividends are declining at the constant rate of 5% per year. If D0 = $6 and rs = 15%, what is the value of Martell Mining's stock?

Dozier Corporation is a fast-growing supplier of office products. Analysts project the following free cash flows (FCFs) during the next 3 years, after which FCF is expected to grow at a constant 7% rate. Dozier's WACC is 12%. a. What is Dozier's horizon, or continuing, value? (Hint: Find the value of all free cash flows beyond Year 3 discounted back to Year 3.) b. What is the firm's value today? c. Suppose Dozier has $100 million of debt and 10 million shares of stock outstanding. What is your estimate of the current price per share?

Paper For Above instruction

Calculating the intrinsic value of a stock requires understanding different valuation models based on dividend growth, free cash flow, and capital structure. This essay analyzes the valuation methods for various companies, emphasizing valuation techniques such as the Gordon Growth Model, multi-stage growth models, and the impact of capital structure on stock valuation. Additionally, it explores how changes in dividend growth rates, market yields, and economic factors influence stock prices.

Valuing Fletcher Company's Stock Price in the Future

Fletcher Company's current stock price is $36, with a last dividend of $2.40 and a required rate of return of 12%. Since dividends are expected to grow at a constant rate, g, the Gordon Growth Model (GGM) can be employed to determine the future stock price. The GGM formula is P = D / (r - g), where P is the stock price, D is the dividend, r is the required rate of return, and g is the growth rate of dividends.

To estimate the stock price five years from now, first, calculate the dividend at year 5. The dividend growth is assumed to be constant. Therefore, D5 = D0 (1 + g)^5. Subsequently, the future stock price at year 5, P5, can be determined as P5 = D6 / (r - g), where D6 = D5 (1 + g). This approach aligns with the dividend discount model, considering that the stock price at year 5 reflects the present value of dividends beyond that point, discounted back to year 5.

Applying Multi-Stage Growth Models for Snyder Computers Inc.

Snyder Computers is experiencing phases of rapid growth, necessitating a multi-stage valuation approach. Initially, dividends are expected to grow at 15% for the first two years, then at 13% for the following year, and finally stabilize at a 6% growth rate. The last dividend was $1.25, and the required return is 12%. To find the current value, forecast dividends for each year, discount them back to present, and calculate the terminal value at the end of Year 3, which then gets discounted to today. This method captures the transition of high-growth phases to a stable growth period.

Valuation of Smith Technologies Using Free Cash Flow

Smith Technologies' valuation hinges on its free cash flow (FCF), which is projected to be $150 million next year, growing at 5% indefinitely. With a WACC of 12%, the firm’s total enterprise value (EV) is calculated using the perpetuity growth formula: EV = FCF1 / (WACC - g). Dividing the total enterprise value by the number of shares (50 million) yields the per-share value. This approach underscores the importance of FCF as it reflects the company's ability to generate cash for investors.

Valuing Preferred Stock in Ezzell Corporation

The valuation of preferred stock employs the perpetuity model, considering its dividend and yield. At an 8% yield, the stock’s value equals the annual dividend divided by the yield (Price = Dividend / Yield). When yields increase to 12%, the market price decreases accordingly, illustrating the inverse relationship between yield and price in fixed-income securities. Such calculations highlight the sensitivity of preferred stock values to interest rate fluctuations.

Assessing the Declining Stock Value for Martell Mining Company

The declining dividends due to depletion and rising costs can be assessed using the Gordon Growth Model, with the given dividend D0 = $6 and a decline rate of 5%. The stock’s value is calculated as D0 * (1 + g) / (r - g), considering the negative growth rate. It demonstrates how decreasing dividends impact stock valuation, especially in commodities with resource depletion issues, emphasizing the importance of growth assumptions in valuation models.

Valuation of Fast-Growth Company Dozier Corporation

For Dozier Corporation, projections of FCF over three years are discounted each year using the WACC of 12%. The horizon or continuing value beyond Year 3 is computed by treating Year 3 FCF as the base for a perpetuity growing at 7%. Discounting this terminal value back to today involves calculating the sum of the present values of cash flows and the terminal value, which together provide the firm’s total valuation. Dividing this by the number of shares and adjusting for debt gives the current stock price.

Conclusion

Valuation models vary depending on company growth stages, capital structure, and market conditions. The Gordon Growth Model, multi-stage models, and free cash flow approaches are essential tools for analysts. Proper application of these models allows investors to estimate the intrinsic value of stocks accurately, guiding investment decisions amid economic uncertainties and market fluctuations.

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