User Account

All Pages

Common stock value-all growth models

Assignment Help Finance Basics
Reference no: EM131209228

Common stock value: All growth models

You are evaluating the potential purchase of a small business currently generating $42,500 of after-tax cash flow (D0 = $42,500). On the basis of a review of similar-risk investment opportunities, you must earn an 18% rate of return on the proposed purchase. Because you are relatively uncertain about future cash flows, you decide to estimate the firm's value using several possible assumptions about the growth rate of cash flows.

a. What is the firm's value if cash flows are expected to grow at an annual rate of 0% from now to infinity?

b. What is the firm's value if cash flows are expected to grow at a constant annual rate of 7% from now to infinity?

c. What is the firm's value if cash flows are expected to grow at an annual rate of 12% for the first 2 years, followed by a constant annual rate of 7% from year 3 to infinity?

P7-16 Free cash flow valuation

Nabor Industries is considering going public but is unsure of a fair offering price for the company. Before hiring an investment banker to assist in making the public offering, managers at Nabor have decided to make their own estimate of the firm's common stock value. The firm's CFO has gathered data for performing the valuation using the free cash flow valuation model. The firm's weighted average cost of capital is 11%, and it has $1,500,000 of debt at market value and $400,000 of preferred stock at its assumed market value. The estimated free cash flows over the next 5 years, 2016 through 2020, are given below. Beyond 2020 to infinity, the firm expects its free cash flow to grow by 3% annually.

Year (t) Free cash flow (FCFt)

2016 $200,000

2017 250,000

2018 310,000

2019 350,000

2020 390,000

a. Estimate the value of Nabor Industries' entire company by using the free cash flow valuation model.

b. Use your finding in part a, along with the data provided above, to find Nabor Industries' common stock value.

c. If the firm plans to issue 200,000 shares of common stock, what is its estimated value per share?

Reference no: EM131209228

Questions Cloud

Can the solow growth model account for the persistence : Can the Solow growth model account for the persistence in income inequality across countries due to persistent difference in population growth rates? Explain and discuss.
Explain why a trip to hawaii next year would be valued more : Use the concept of present value to explain why a trip to Hawaii next year would be valued more to most people than the same trip in the year 2015.
Digital image-processing machine : Gaia Research hospital purchased a digital image-processing machine three years ago at a cost of $45,000. The machine had an expected life of eight years at the time of purchase and an expected salvage value of $5,000 at the end of the eight years..
Derive the conditions describing a steady state : Solve these conditions to obtain the steady-state values of C, K, and L. c. What is the effect on the steady state of an increase in b?
Common stock value-all growth models : You are evaluating the potential purchase of a small business currently generating $42,500 of after-tax cash flow (D0 = $42,500). On the basis of a review of similar-risk investment opportunities, you must earn an 18% rate of return on the proposed..
Explain how real interest rates could be very high : During the Great Depression of the 1930s, nominal interest rates were close to zero. - Explain how real interest rates could be very high even though nominal interest rates were very low.
Graph the steady state capital-labor ratio against tax rate : Repeat the previous exercise but include a tax on interest income. Graph the steady state capital-labor ratio against the tax rate. Comment on the results.
Analyst for a sporting goods corporation : You are an analyst for a sporting goods corporation that is considering a new project which will take advantage of excess capacity in a existing plant.
Solve for the growth rate of consumption as a function : Solve for the growth rate of consumption as a function of α and graph for various values of α. What is the effect of increasing α? Comment on your findings.

Reviews

Write a Review

Finance Basics Questions & Answers

  What are the pros and cons of each of these 3 methods of

write a paper of 1700 words that addresses the following topic. each topic must have headings1. what are the pros and

  Suppose that the plant can be sold for 90 million to

an auto plant that costs 100 million to build can produce a new line of cars that will generate cash flows with a

  What is the required rate of return on clover stock

Parr Paper's stock has a beta of 1.40, and its required return is 13.00%. Clover Dairy's stock has a beta of 0.80. If the risk-free rate is 4.00%, what is the required rate of return on Clover's stock? (Hint: First find the market risk premium.)

  Grow at the long-run growth rate in earnings

In 2008 the Keenan Company paid dividends $3.6 million on net income of $10.8 million. The year was normal, and for the past 10 years, earnings have grown at a constant rate of 10%.

  What is the value of a stock

What is the value of a stock with a required return of 10% and has growth of 13 % for 2 years then growth of 7 % thereafter, with an initial dividend of 4.25?

  Which of the following investments would have the highest

1. which of the following investments would have the highest future value at the end of 10 years? assume that the

  Able baker and charlie are the only three stocks in an

able baker and charlie are the only three stocks in an index. the stocks sell for 94 312 and 90 respectively. if baker

  Each summary must be at least one double-spaced typewritten

each student is required to summarize ten articles from journals found online.each summary must be at least one

  Determine the common stock''s dividend yield

Technology's common stock is selling at $30 per share today. Southwest just paid a $2 dividend. Its dividend is expected to grow by 5% in the coming year. The required rate of return on Southwest is 15%. Determine the common stock's dividend yield an..

  Estimate the price of the asset using the approximation

an asset will provide cash inflows of 8000 in 4 years and 20000 in 10 years. the assert is currently priced at 5 annual

  How much should the dollar change in value during next year

What should the Japanese prime rate be? According to forward parity, by how much should the dollar change in value during the next year?

  Posting strong economic growth

During the 1990s, Mexico and Argentina went from economic pariahs with huge foreign debts to countries posting strong economic growth and welcoming foreign investment. What would you expect these changes to do to their current-account balances?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

Submit Assignment

Academics

Major Subjects

Majors

Get In Touch

whatsapp: +1-415-670-9521

Phone: +1-415-670-9521

Email: [email protected]

TERMS & POLICIES

HELP & SUPPORT

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd