Question

JKL Corp. has earnings of $1.38 per share. MNO Corp. is a close competitor, with $1.59 earnings per share. If MNO stock is currently trading at $39.75 and you believe that the stocks are comparable, what would be a reasonable price expectation for JKL stock?

A company’s most recent quarterly dividend was $0.25. This dividend is expected to grow by 3% a year. If investors require an 11% annual return on the stock, what should the stock’s price be?

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 3% beyond year 3. What is the terminal value of the company in year 3 if the WACC is 8%?

Answer 1

1. The price is computed as follows:

= Earnings per share of JKL Corp x (Price of MNO / Earnings per share of MNO)

= $ 1.38 x ($ 39.75 / $ 1.59)

= $ 34.50

2. The price is computed as follows:

= [ (Quarterly dividend x 4) x (1 + growth rate) ] / (return - growth rate)

= [ ($ 0.25 x 4) x 1.03 ] / (0.11 - 0.03)

= $ 1.03 / 0.08

= $ 12.875

3. The value is computed as follows:

= [ FCF in year 3 x (1 + growth rate) ] / (WACC - growth rate)

= [ ($ 6,000,000 x 1.03) ] / (0.08 - 0.03)

= $ 123,600,000

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