Multi-step FAS Q

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whodey

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Calculate the value of a stock based on the following information:
Sales = $1.0 billion
Assets = $1.5 billion
Debt-to-Equity = 30%
EBT Margin = 20%
Tax Rate = 40%
Real Risk-free Rate = 4%
Expected Inflation = 3%
Beta = 1.2
Market Risk Premium = 8%
Current EPS = $3.00

a. $5.25
b. $8.50
c. $9.08
d. $8.41

I get d. $8.41 using the P/E in DDM, but this is incorrect according to the answer key. What do you think?



Edited 3 time(s). Last edit at Thursday, May 8, 2008 at 06:11PM by whodey.
 
do you have the retention rate, the dividend payout or the dividend?
 
lol yeah i've been trying to solve this for the past 5 minutes and i feel like i need more info
 
Really sorry about that, yes the dividend pay out ratio is 25%.
 
Yes, the book says C. I agree if you do the DDM but using the PE model it think it should be D.
 
EBT margin = 20%=> EBT=0.2*sales=0.2*1bil=0.2bil

NI=(1-tax rate)*EBT=0.6*0.2bil=120mil

D/E=0.3=>E=A/1.3=1.5bil/1.3=1.15bil

ROE=NI/E=0.12/1.15=10.4%

g = ROE*RR=ROE*(1-dividend payout)=10.4*0.75=7.8

Current Dividend=dividend payout *EPS=0.25*3=0.75

Next dividend = 0.75*1.078=0.81

Required return = Risk free rate + beta *market risk premium = ((1+real risk free)*(1+expected inflation) -1)+ beta *market risk premium = ((1.04*1.03)-1)+1.2*0.08=16.72%

Price = Next Dividend/(Required return � growth rate)=0.81/(16.72%-7.8%)=9.08072
 
you can go with risk free rate= real risk free+expected inflation, but it gets you a slightly higher number.
 
map1, I completely agree with your calculations but I also believe mine are correct as well.

[.25/(.1672-.078)] * 3 = $8.41

My question is on the real test I am assuming they will specify what method to use to calculate the price. Correct?
 
Whodey - Question says Current EPS = $3.00; to get next years EPS multiply by growth rate (factor of 1.078)...

So ans will be 8.41*1.078 = $9.07

Price = D1/(k-g)

D1 = Next years EPS*Div Payout = 3*0.25*1.078



Edited 1 time(s). Last edit at Thursday, May 8, 2008 at 07:20PM by thunderanalyst.
 
yeah that's D1, but he's asking about this equation:

P0/E1 = (D1/E1)/(k-g)

which gives you a different result.
 
I don't know where I am thinking wrong, but either equation should give 9.08.

P0/E1=(D1/E1)/k-g = P0/E1 = Dividend payout/(k-g) ---> P0/E1=0.25/(0.1672-0.078) = 2.8

P0 = 2.8*E1 = 2.8*(1.078*3) = 9.06

He is using E0 and not E1 in the equation, and getting different result (or may be I just got back fro work :)



Edited 1 time(s). Last edit at Thursday, May 8, 2008 at 07:32PM by thunderanalyst.
 
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