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7
Valuation of Stocks and Corporations
Contents
Question 1:    3
Question 2:    5
Question 3:    6
Question 4:    7
Question 5:    9
Question 6:    10
Question 7:    11
Question 8:    12
References:    13
Question 1:
Step 1: Calculation of Required RATE OF Return (Ke) by using the CAPM method:
Formula:
Ke = Rf + (Beta * Market Risk Premium)
Ke = 3.7% + (0.9 * 5.0%)
Ke = 8.2%
Step 2: Calculation of dividend growth rate using DDM model:
Ke = (D1 / P0) + g
8.2 % = (1.50 / 31) + g
0.082 = 0.0484 + g
g = 0.0336
g = 3.36%
Step 3: calculation of the stock price at the end of year 3 (P3)
Formula:
P3 = P0 * (1+g)3
P3 = 31 * (1+0.0336)3
P3 = 31 * (1.0336)3
P3 = $34.23 per share
Therefore, the stock price at the end of year 3 (P3) would be $34.23.
Question 2:
Free cash flow in 1 year (FCF1) = $80000
Free cash flow in 2 years (FCF2) = $100000
Growth rate (g) = 8% / 0.08
WACC (r) = 14% / 0.14
A. Terminal or horizon value of operations:
= FCF2 (1+g) / (r – g)
= $100000 (1 + 0.08) / (0.14 – 0.08)
= $1800000
B. Value of Kendra’s operations:
= {FCF1 / (1+r)1} +{FCF2 / (1+r)2} + {Terminal Value / (1+r)2}
= {$80000/ (1+0.14)1} +{$100000/...