Question

1. You expect Tiger Corp will pay $50 million in dividends and repurchase $80 million of its stock over the next 12 months (Year 1). You expect dividends and share repurchases to grow 8% in Year 2 and 7% in Year 3. You also expect Tiger could be bought by a larger competitor at the end of Year 3 for $3.5 billion. If all payments are made at year end, and you have calculated the cost of equity to be 9.0%, what do you estimate the market value of Tiger’s net worth should be now? (Start by drawing a timeline.)

2. If Tiger Corp of Q #1 currently has 100,000,000 shares outstanding, what is your estimated market value per share now?

3. GEP Corp is considering a large plant expansion/modernization which will cost $115 million initially and another $70 million at the end of year 2. This project is expected to produce incremental after-tax profits of $35 million, $40 million, $35 million, $62 million, and $47 to be received at the end of years 1, 2, 3, 4 and 5 respectively. If the WACC is 7%, what is the project’s NPV? (Start by drawing a timeline.)

4. What is the MIRR for GEP’s project described in Q #3? (Use 7% WACC for both PV of costs and FV of returns. Your answer should be a % carried to 1 place.)

Answer 1

1)

Year	CF
1	$    130.00
2	$    140.40
3	$    150.23
TV	$ 3,500.00

Total Payout in year 1 = 50 + 80 = 130, it will grow at 8% in year 2 and 7% in year 3

Net worth = CF1 / (1 + r) + CF2 / (1 + r)^2 + (CF3 + TV) / (1 + r)^3

= 130 / 1.09 + 140.40 / 1.09^2 + (150.23 + 3500) / 1.09^3

= $3,056 million

2) Value per share = 3,056 m / 100 m = $30.56

3)

Year	Cash Flows
0	-115
1	35
2	-30
3	35
4	62
5	47
NPV	$0.89

NPV = CF0 + CF1 / (1 + r) + ... + CF5 / (1 + r)^5 = $0.89 million

4) MIRR can be calculated using the same function in excel given the cash flows and WACC

MIRR = 7.13%