1. Stock valuation
The current stock price of Absenthia Inc is $72 per share (end of 2015). The current dividend per share (for 2015) is $5.5. According to financial results of FY15 (financial year 2015), Absenthia Inc has Equity multiplier of 7.5, Asset turnover ratio of 0.55 and gross profit margin of 3.9%. According to most analysts, Absenthia Inc has a beta of 1.9, the coming year’s market return is 10%, and T-bills currently offer a 5.0% return. Absenthia’s net profit margin for the revenant accounting period is 3.2%. The firm plans to maintain indefinitely its traditional payout ratio of 0.6
a) Calculate a constant- growth DDM value for Absenthia Inc at the end of 2015 and compare the computed value to its actual stock price.
Problem 2
A firm considers borrowing around USD 7.4 million (present value) in the bond markets. There are two possibilities. The first is to issue 10000 bonds, with face value of USD 1000, maturity of 9 years, yield to maturity (YTM) of 8%, a 4% coupon rate, making semi-annual payments. The second possibility is to issue 10000 bonds with face value USD 100, maturity of 15 years, a YTM of 9.5%, 90% coupon rate, making semi-annual payments.
a. For each bond, draw a table with the schedule of the firm’s cash payments over time: periods in column 1, cash flows in column 2 and discounted cash flows (discounted to the present) in column 3.
b. Obtain the sum of the present values of all cash payments. How do you interpret this value?
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