5 Firm_Valuation_Exercises.pptxVIP

Corporate Finance Firm Valuation Exercises 2 Problem 1 Newell Corporation, a manufacturer of do-it-yourself hardware and housewares, reported earnings per share of $2.10 in 1993, on which it paid dividends per share of $0.69. Earnings are expected to grow 15% a year from 1994 to 1998, during which period the dividend payout ratio is expected to remain unchanged (@32.86%). After 1998, the earnings growth rate is expected to drop to a stable 6%, and the payout ratio is expected to increase to 65% of earnings. The firm has a beta of 1.40 currently, and it is expected to have a beta of 1.10 after 1998. The Treasury bond rate is 6.25%. 3 Problem 1-A A. What is the expected price of the stock at the end of 1998? Expected Earnings Per Share in 1999 = $2.10 * (1.15)5 * 1.06 = $4.4773 Expected Dividends Per Share in 1999 = $4.48 * 0.65 = $2.9102 Cost Of Equity After 1999 = 6.25% + 1.1 * 5.5% = 12.30% Expected Price at the End of 1998 = Expected DPS in 1999 / (ke in 1999 - g) = = $2.9102 / (0.1230 - 0.06) = $46.1942 4 Problem 1-B B. What is the value of the stock, using the two-stage dividend discount model? Year EPS DPS Terminal Value 1994 $2.4150 $0.7935 1995 $2.7773 $0.9111 1996 $3.1938 $1.0495 1997 $3.6729 $1.2069 1998 $4.2239 $1.3880 $46.1942 Cost of Equity = 6.25% + 1.40 * 5.5% = 13.95% PV of Dividends and Terminal Price (@ 13.95%) = $27.59 5 Problem 2 Ecolab Inc. sells chemicals and systems for cleaning, sanitizing, and maintenance. It reported earnings per share of $2.35 in 1993 and expected earnings growth of 15.5% a year from 1994 to 1998, and 6% a year after that. The capital expenditure per share was $2.25, and depreciation was $1.125 per share in 1993. Both are expected to grow at the same rate as earnings from 1994 to 1998. Working capital is expected to remain at 5% of revenues, and revenues that were $1,000 million in 1993 are expected to increase 6% a year from 1994 to 1998, and 4% a year after that. The firm currently