SarahC07 0 #1 February 18, 2011 Please work this problem and share your answer. Exactly a year from now Company X will have $1 per share in free cash flow from equity. Free cash flow from equity is expected to grow at 10% per year for two years (years 1 - 3) and 2% per year every year thereafter, infinitely. The applicable discount rate is 8%. What is the intrinsic value of the stock today? -- Please treat FCFE as stock dividends for the purpose of solving this problem. HINT: You'll need to understand/use a dividend growth model for a growing perpetuity in order to solve this problem. Please and Thanks. Quote Share this post Link to post Share on other sites SarahC07 0 #2 February 18, 2011 NOTHING? damn. Quote Share this post Link to post Share on other sites Remster 24 #3 February 18, 2011 You want us to do you MBA finance homework? Remster Quote Share this post Link to post Share on other sites SarahC07 0 #4 February 18, 2011 Believe it or not, this is not a homework question. It was on my finance exam yesterday. I found an answer that is greater than 19, but less than 22. As with most graduate level exams, this was a FOUR question exam, so the answer to this question significantly impacts my grade. And damn it, I want an A! My classmates and I have solved this problem with little to no consistency... I think I've heard of 6 different proposed solutions... yikes. Quote Share this post Link to post Share on other sites Bertt 0 #5 February 18, 2011 The discount rate is 8% and the stock is only going to earn 2% after the third year? I'd rather buy a treasury note.You don't have to outrun the bear. Quote Share this post Link to post Share on other sites ManagingPrime 0 #6 February 18, 2011 To complicate matters further I came up with $24.56 Quote Share this post Link to post Share on other sites warpedskydiver 0 #7 February 19, 2011 $4.55 for two years plus the unforseen values for years afterwards. This is assuming a Risk Free Interest Rate (%) of 2.20% The time after two years is actually a feel good or faith value as it has no term and is actually intangible. I slept in a holiday in once. YMMV if you have psychic powers or a time machine. A safe bet would be based on the 10% projected for a longer term, anything over that is a plus. Based on your choices I would surmise that they intended the investment to yield for about five years. It also depends on your methodology as well, because there is some perception not based on actual data. Warren Buffets calculator would be a good asset. Was this open book, open notes and google allowed? So they still selling crystal balls? Quote Share this post Link to post Share on other sites warpedskydiver 0 #8 February 19, 2011 Using the other calculator I get a value of $22.73 Quote Share this post Link to post Share on other sites warpedskydiver 0 #9 February 19, 2011 A third calc gives the value of $20.45 with $0.45 Earnings per Share Estimate This is assuming he same values as the aforementioned calcs Quote Share this post Link to post Share on other sites SarahC07 0 #10 February 19, 2011 My answer was $20.11 w/o rounding. After delving into this problem with a classmate of mine, it appears as though the beginning time (t) for my growing perpetuity was incorrect. He thinks the correct answer is $19.16 and I tend to agree. The good news: I showed all of my steps and will hopefully receive the majority of the points associated with this problem. I'm also pretty confident that I answered the remaining three questions 100% correctly. Also to add, I solved all parts to every other question both algebraically and with a financial calculator. If I'm lucky, my professor will see that I truly understand what I was taught and be nice.... maybe Quote Share this post Link to post Share on other sites warpedskydiver 0 #11 February 19, 2011 That is even if he actually knows the answerhe is going off the course shell and that's all Quote Share this post Link to post Share on other sites ManagingPrime 0 #12 February 19, 2011 WTF am I doing at a club checking on this thread for. I hate this question and it's not even my test. Lol Quote Share this post Link to post Share on other sites SarahC07 0 #13 February 19, 2011 Don't worry, you're not alone! I really really enjoy finance and accounting ... Quote Share this post Link to post Share on other sites popsjumper 2 #14 February 19, 2011 I got $0. I bought shares at $1 and caused the company to go bankrupt....just like all my other stocks. My reality and yours are quite different. I think we're all Bozos on this bus. Falcon5232, SCS8170, SCSA353, POPS9398, DS239 Quote Share this post Link to post Share on other sites theonlyski 3 #15 February 19, 2011 $42 "I may be a dirty pirate hooker...but I'm not about to go stand on the corner." iluvtofly DPH -7, TDS 578, Muff 5153, SCR 14890 I'm an asshole, and I approve this message Quote Share this post Link to post Share on other sites turtlespeed 212 #16 February 19, 2011 Quote $42 $4.20 I'm not usually into the whole 3-way thing, but you got me a little excited with that. - Skymama BTR #1 / OTB^5 Official #2 / Hellfish #408 / VSCR #108/Tortuga/Orfun Quote Share this post Link to post Share on other sites Amazon 7 #17 February 19, 2011 Quote I got $0. I bought shares at $1 and caused the company to go bankrupt....just like all my other stocks. Sounds like some of the stock I bought in the 90's that used to be worth real money I STILL feel it would be appropriate to de-nut a few execs who should have been removed from the gene pool permanently Quote Share this post Link to post Share on other sites Join the conversation You can post now and register later. If you have an account, sign in now to post with your account. Note: Your post will require moderator approval before it will be visible. Reply to this topic... × Pasted as rich text. Paste as plain text instead Only 75 emoji are allowed. × Your link has been automatically embedded. Display as a link instead × Your previous content has been restored. Clear editor × You cannot paste images directly. Upload or insert images from URL. Insert image from URL × Desktop Tablet Phone Submit Reply 0
SarahC07 0 #2 February 18, 2011 NOTHING? damn. Quote Share this post Link to post Share on other sites
Remster 24 #3 February 18, 2011 You want us to do you MBA finance homework? Remster Quote Share this post Link to post Share on other sites
SarahC07 0 #4 February 18, 2011 Believe it or not, this is not a homework question. It was on my finance exam yesterday. I found an answer that is greater than 19, but less than 22. As with most graduate level exams, this was a FOUR question exam, so the answer to this question significantly impacts my grade. And damn it, I want an A! My classmates and I have solved this problem with little to no consistency... I think I've heard of 6 different proposed solutions... yikes. Quote Share this post Link to post Share on other sites
Bertt 0 #5 February 18, 2011 The discount rate is 8% and the stock is only going to earn 2% after the third year? I'd rather buy a treasury note.You don't have to outrun the bear. Quote Share this post Link to post Share on other sites
ManagingPrime 0 #6 February 18, 2011 To complicate matters further I came up with $24.56 Quote Share this post Link to post Share on other sites
warpedskydiver 0 #7 February 19, 2011 $4.55 for two years plus the unforseen values for years afterwards. This is assuming a Risk Free Interest Rate (%) of 2.20% The time after two years is actually a feel good or faith value as it has no term and is actually intangible. I slept in a holiday in once. YMMV if you have psychic powers or a time machine. A safe bet would be based on the 10% projected for a longer term, anything over that is a plus. Based on your choices I would surmise that they intended the investment to yield for about five years. It also depends on your methodology as well, because there is some perception not based on actual data. Warren Buffets calculator would be a good asset. Was this open book, open notes and google allowed? So they still selling crystal balls? Quote Share this post Link to post Share on other sites
warpedskydiver 0 #8 February 19, 2011 Using the other calculator I get a value of $22.73 Quote Share this post Link to post Share on other sites
warpedskydiver 0 #9 February 19, 2011 A third calc gives the value of $20.45 with $0.45 Earnings per Share Estimate This is assuming he same values as the aforementioned calcs Quote Share this post Link to post Share on other sites
SarahC07 0 #10 February 19, 2011 My answer was $20.11 w/o rounding. After delving into this problem with a classmate of mine, it appears as though the beginning time (t) for my growing perpetuity was incorrect. He thinks the correct answer is $19.16 and I tend to agree. The good news: I showed all of my steps and will hopefully receive the majority of the points associated with this problem. I'm also pretty confident that I answered the remaining three questions 100% correctly. Also to add, I solved all parts to every other question both algebraically and with a financial calculator. If I'm lucky, my professor will see that I truly understand what I was taught and be nice.... maybe Quote Share this post Link to post Share on other sites
warpedskydiver 0 #11 February 19, 2011 That is even if he actually knows the answerhe is going off the course shell and that's all Quote Share this post Link to post Share on other sites
ManagingPrime 0 #12 February 19, 2011 WTF am I doing at a club checking on this thread for. I hate this question and it's not even my test. Lol Quote Share this post Link to post Share on other sites
SarahC07 0 #13 February 19, 2011 Don't worry, you're not alone! I really really enjoy finance and accounting ... Quote Share this post Link to post Share on other sites
popsjumper 2 #14 February 19, 2011 I got $0. I bought shares at $1 and caused the company to go bankrupt....just like all my other stocks. My reality and yours are quite different. I think we're all Bozos on this bus. Falcon5232, SCS8170, SCSA353, POPS9398, DS239 Quote Share this post Link to post Share on other sites
theonlyski 3 #15 February 19, 2011 $42 "I may be a dirty pirate hooker...but I'm not about to go stand on the corner." iluvtofly DPH -7, TDS 578, Muff 5153, SCR 14890 I'm an asshole, and I approve this message Quote Share this post Link to post Share on other sites
turtlespeed 212 #16 February 19, 2011 Quote $42 $4.20 I'm not usually into the whole 3-way thing, but you got me a little excited with that. - Skymama BTR #1 / OTB^5 Official #2 / Hellfish #408 / VSCR #108/Tortuga/Orfun Quote Share this post Link to post Share on other sites
Amazon 7 #17 February 19, 2011 Quote I got $0. I bought shares at $1 and caused the company to go bankrupt....just like all my other stocks. Sounds like some of the stock I bought in the 90's that used to be worth real money I STILL feel it would be appropriate to de-nut a few execs who should have been removed from the gene pool permanently Quote Share this post Link to post Share on other sites
