Assignment:
Question 1: Valuation of a constant growth stock - A stock is expected to pay a dividend of $0.50 at the end of the year (that is D1 = 0.50), and it should continue to grow at a constant rate of 7 percent a year. If its required return is 12 percent, what is the stock’s expected price 4 years from today?
Cost of common equity - EPS was $6.50 in 2005, up from $4.42 in 2000. The company pays out 40 percent of its earnings as dividends, and its common stock sells for $36.
a. Calculate the past growth rate in earnings. (Hint: This is a 5 year growth period).
b. The last dividend was D0 = 0.4($6.50) = ($2.60). Calculate the next expected dividend, D1, assuming the past growth rate continues.
c. What is cost of retained earnings, rs?
Question 2:
NPV - Project K costs $52,125, its expected net cash inflows are $12,000 per year for 8 years, and is WACC is 12 percent. What is the project’s NPV?
- What is the project’s IRR?
- What is the project’s MIRR?
- What is the project’s payback?
- What is the project’s discounted payback?
Question 3: In BusinessWeek, issue of August 7, 2006, there are calculations of the value of well-known brands. Here are some of the results presented:
| Brand |
2006 Brand Value ($billion) |
2005 Brand Value ($billion) |
| Coca-Cola |
$67.00 |
$67.50 |
| GE |
$48.90 |
$47.00 |
| Nokia |
$30.10 |
$26.50 |
| Toyota |
$27.90 |
$24.80 |
| McDonalds |
$27.50 |
$26.00 |
| Marlboro |
$21.40 |
$21.20 |
| American Express |
$19.60 |
$18.60 |
How were these values calculated?
Parent companies were not valued, which is why Procter and Gamble is absent.
Airline brands are not valued, because it was too hard to separate brand values from factors such as routes and schedules.
Step 1 was to figure out what % of company sales revenues were associated with a brand (for McDonalds it was 100%, but for Marlboro it was only a portion).
Step 2 was to figure out five future years of earnings for each brand. Intangible assets such as patents and management strength were stripped out in order to assess what portion of those earnings were attributable to the brand.
Step 3 was to determine the risk profile of those earnings, taking into account market leadership, stability, and global reach of each brand. That led to a discount rate which was applied to the brand earnings to get a net present value as shown in the table above.
BusinessWeek believes that these net present values come close to representing the true economic worth of each brand.
Question: do you agree or disagree with BusinessWeek that these net present values come close to representing the true economic worth of each brand?
Be sure to present reasons for and against your position.