Question

GHI Ltd. is not currently paying a dividend. In five years, it expects to pay a dividend of $0.50, and dividends are expected to grow at 4% a year afterward. If the return demanded is 12%, what should GHI be worth today?

Our company projects the following FCFs for the next 3 years: $5,000,000; $5,500,000; $6,000,000. Future growth is expected to slow to 5% beyond year 3. What is the terminal value of the company in year 3 if the WACC is 8%?

A stock is currently not paying dividends. Three years from now, it is expected to start paying a quarterly dividend of $0.10 per share, with growth of 5% per year thereafter. If investors require a 10% annual return, what should the stock’s price be currently?

Answer 1

1)

Present value = Future value / (1 + rate)^time

Year 5 dividend = 0.5

Year 6 dividend = Year 5 dividend (1 + growth rate)

Year 6 dividend = 0.5 (1 + 0.04)

Year 6 dividend = 0.52

Value in year 5 = Dividend 6 / required rate - growth rate

Value in year 5 = 0.52 / 0.12 - 0.04

Value in year 5 = 0.52 / 0.08

Value in year 5 = 6.5

Value of stock = 0.5 / (1 + 0.12)^5 + 6.5 / (1 + 0.12)^5

Value of stock = 0.283713 + 3.688275

Value of stock = $3.97

GHI will be worth $3.97

2)

Year 4 FCF = Year 3 FCF (1 + rate)

Year 4 FCF = 6,000,000 (1 + 0.05) = 6,300,000

Terminal value = Year 4 FCF / required rate - growth rate

Terminal value = 6,300,000 / 0.08 - 0.05

Terminal value = 6,300,000 / 0.03

Terminal value = $210,000,000