Complete five year forecasted pro forma financial statement

Assignment Help Financial Management

Reference no: EM131164362

Question 1:

Consider a very solid company that knows what its financial needs will be over the next 5 years (this is obviously a very hypothetical example in today's climate). There is no desire to change debt, or issue or repurchase stock, and the company needs to maintain a cash balance of $56 per year. This means that dividends are the plug in this model. Build out the pro-forma financial statement based on the assumptions and template below:

Key accounting relations:
1. Total Assets = Total Liabilities + Equity
2. Total Assets = Current liabilities + Debt + Stock +Accumulated Ret. Earnings
3. Accumulated Ret. Earnings = Last Period Ret. Earnings + Current Ret. Earnings
4. Current Ret. Earnings = Profit after tax - Dividends

Build a one-page spreadsheet model to answer the questions listed below:
a) Complete the five-year forecasted pro-forma financial statement for the firm.

b) Assuming a terminal growth rate of dividends of 3% and that year 0 dividends have already been paid out, use the dividend discount model to compute the value of one share of the firm.

Question 2:
Based on the regressions below determine the value per share (price) of the firm. Assume that the risk free rate is 3% and the market premium is 6%. Dividends are paid every period and last dividend paid was $2 per share. The next dividend is one year away. The answer to this question is not more than 3 or 4 lines. You need to use the regression output to form your forecasts (It is important to check for statistical significance here).

Question 3:
Consider a stock with an expected dividend of $2 next year (year 1). For the next 4 years (years 2-5), dividends are expected to grow at 10% per year. After that, dividends are expected to grow at the steady state rate of 3%.

a) Given a 15% cost of capital, what is a fair price for this stock?

b) Instead of being $2 per share, assume the year 1 dividend is random. Let's assume that the year 1 dividend has a normal distribution with a mean of $2 per share and a standard deviation of $0.75 per share. Do not allow negative dividends - make them zero if you simulate a negative value.

(Hint: you may want an if statement here!). Use the 15% cost of capital in your simulation. Also, please run the simulation for 10,000 iterations.

c) What is the mean value and standard deviation for the stock price from your simulation? What are the 5th and 95th percentiles of the simulated stock price?

d) If you buy 1 share at the price calculated in part (a) above, what is the probability that you will lose money on your investment? Please explain how you did this in a clear concise text-box.

Attachment:- Questins 1-2-3.rar

Reference no: EM131164362

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