Subject: Business    / Finance
Question

1.As an analyst at Churnem & Burnem Securities, you are responsible for making recommendations to your firm’s clients regarding common stocks. After gathering data on Denver Semiconductors, you have found that its dividend has been growing at a rate of 8% per year to the current (D0) $0.75 per share. The stock is now selling for $24 per share, and you believe that an appropriate rate of return for this stock is 12% per year.

a. If you expect that the dividend will grow at an 8% rate into the foreseeable future, what is the highest price at which you would recommend purchasing this stock to your clients?

b. Suppose now that you believe that the company’s new product line will cause much higher growth in the near future. Your new estimate is for a three-year period of 20% annual growth to be followed by a return to the historical 8% growth rate. Under these new assumptions, what is the value of the stock using the two-stage dividend growth model?

c. You now realize that it is likely that the growth will transition from 20% down to 8% gradually, rather than instantaneously. If you believe that this transition will take five years, what is the value of the stock today? Use the three-stage growth model.

d. for each of the answers from above, create an IF statement that shows whether the stock is undervalued, overvalued, or fairly valued.

2.

The Miracle Clean Company has some new products that it expects to lead to high growth in the near future. It has given analysts the following forecasts for the next three years.

2012

2013

2014

Depreciation

15,000

21,000

27,000

EBIT

125,000

145,000

165,000

Investment in Operating Assets

35,000

25,000

10,000

The firm’s debt has a current market value of $250,000 and it has $64,000 in marketable securities. There are 100,000 common shares outstanding. The tax rate is 35% and WACC is estimated at 12%

Calculate the free cash flows for the first three years
After 2014 free cash flow growth is expected to slow to 8% per year permanently. What is the value of the stock today?
without the new products, free cash flow in 2012 would be $55,000 and it would grow at 8% per year forever. what is the value of the stock if the new products aren’t introduce ?

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