Question

At the end of 2011, 40% of CARE Software, Inc.'s $1 million in total assets were debt-financed. The company's cost of debt was 6 percent, and its cost of equity was 12 percent.2011 EBIT was $200,000, and is expected to remain constant. Income was taxed at 40 percent. The 50,000 shares of common stock outstanding had a year-end 2011 book value of $12.00 per share. The dividend payout ratio was 100%.Calculate the intrinsic value of a share of stock.

A company has a book value of $5 per share. It is expected to earn $0.60 per share in perpetuity, pays out all of its earnings as dividends, and has a required rate of return on equity of 10%. Calculate the value of the stock using the dividend discount model and the residual income model.

Rapid City Motors Co. expects to grow at 20% for two years. After that it expects 8% growth indefinitely. The firm recently declared a $4.00 annual dividend. Similar stocks return about 12%. How much should a share of Rapid City be worth today? $98.36 $155.50 $132.84 $147.89 ____ 50. Assume that the dividend on Central Power Company's $3.25 preferred stock issue is paid annually at the end of the year. Determine the price of this issue if its return is 12%. $3.25 $39 $12 $27.08 QUICK City Co. expects to grow at 20% for two years. After that it expects 8% growth indefinitely. The firm recently declared a $4.00 annual dividend. Similar stocks return about 12%. How much should a share of Rapid City be worth today?

Assume that the dividend on Central Power Company's $3.25 preferred stock issue is paid annually at the end of the year. Determine the price of this issue if its return is 12%

Answer 1

1) Intrinsic Value is 17.60

Total Assets	10,00,000
Debt	40%	4,00,000
Interest	6%	24,000
EBIT	200000
Interest	24,000
EBT	1,76,000
Tax	70,400	40%
Net Earning	1,05,600
Dividend	1,05,600
DPS	2.11	50000
Cost of Equity	12%
Value of Equity	17.60	DPS/COE

2) Dividend Discount Model= 0.6/10%= USD 6

THe residual income mode is return available for equity holders. In the current scenario dividend is constant till perpetuity therefore the answer will be same as dividend discount model

3) The value of stock would be 164.4

Year	0	1	2	3
Dividend	4	4.8	5.76	6.2208
g		20%	20%	8%
r		12%	12%	12%
Discount value		4.29	4.59	155.52
		d1/1+r	d2/(1+r)^2	d3/(r-g)
sum of dicounted values		164.40

4) Preferred dividend= 3.25

Return= 12%

Value= 3.25/12%= 27.08

5 & 6 is repeated and answer is same as 3&4