1. (Three-stage DDM) The current dividend for Connell Corp is $1.00. In stage 1, which lasts 3 years, the dividend will grow at 0% per year. In stage 2, which also lasts 4 years, the dividend will grow at 30% per year. Finally, in stage 3, the dividend will grow at 6% forever.
A. If the required rate of return is 10%, what is the value per share?
B. If the current market price of Connell Corp is $35, what will be your rate of return if you realize all of the dividends described in the model?
2. (FCFF valuation model) Build a valuation model for Dragon Limited based on the following information:
Sales were $100 million in the year just ended. Sales will grow at 100% annually for two years, and then at 5% annually forever.
EBIT will be 30% of sales.
Depreciation is 4% of the current year's sales
Capital expenditures are 4% of the current year's sales plus 40% of the current year's increase in sales
The investment in working capital will be 10% of the current year's increase in sales
The income tax rate for Dragon Limited is 25%
The weighted average cost of capital is 12%
Dragon has 40 million outstanding shares
Dragon has $200 million of outstanding debt.
What is the Dragon Limited value per share?