Next year's free cash flows for a target firm are expected to be$1,835,000, with constant growth of 3% per year for the foreseeablefuture. The firm's WACC is $16% and current assets are valued at$840,000, with current liabilities estimated at $756,000. Long termdebt has a market value of $8.5 million and the firm has outstandingpreferred stock worth $900,000. If there are 250,000 common sharesoutstanding, what is the estimated market value of the firm's stock?Select one:$5,699,385O $3,575,000O $4,715,000O $14,115,385O $4,799,385

Common stock value will be the present value of all future earnings less debt and preferred stock

Answered: Next year's free cash flows for a…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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A company projects a rate of return of 20% on new projects. The executive team plan to plow back 20% of all earnings into the firm. Earnings this year will be $6 per share, and investors expect a rate of return of 12% on stocks facing the same risks as the company. 1) what is the sustainable growth rate 2) what is the stock price 3) What is the present value growth opportunities 4) what is the P/E ration 5) what would the price and PE ratio be if the firm paid out all earnings as dividends?
The stock of Z-Tech Plc is currently selling for £10 per share. Earnings per share in the coming year are expected to be £1.50. The company has a policy of paying out 20% of its earnings each year in dividends. The rest is retained and invested in projects that earn a 7% internal rate of return per year. This situation is expected to continue indefinitely. a. Assuming the current market price of the stock reflects its intrinsic value as computed using the constant-growth DDM, what rate of return do Z-Tech’s investors require? b. By how much does Z-Tech’s stock price change if all its earnings are paid as dividends and nothing is reinvested? c. If the company were to increase its dividend payout ratio from 20% to 60%, what would happen to its stock price?
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