PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 4, Problem 30PS
Valuing a business Mexican Motors’ market cap is 200 billion pesos. Next year’s
- a. Assume that the 7.5% growth rate is expected to continue forever. What
rate of return are investors expecting? - b. Mexican Motors has generally earned about 12% on book equity (
ROE = 12%) and reinvested 50% of earnings. The remaining 50% of earnings has gone to free cash flow. Suppose the company maintains the same ROE and investment rate for the long run. What is the implication for the growth rate of earnings and free cash flow? For thecost of equity ? Should you revise your answer to part (a) of this question?
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Mexican Motor's market cap is 200 billion pesos. Next year's cash flow is 8.6 billion pesos. Security analyst are forecasting that free cash flow will grow by 7.60% per year for the next five years.
a. Assume that the 7.60 growth rate is expected to continue forever. What rate of return are investors expecting?
b1. Mexican Motors has generally earned about 10% on book equity (ROE= 10%) and reinvested 50% of earnings. The remaining 50% of earnings has gone to free cash flow. Suppose the company mantians the same ROE and investment rate for the long run. What will be the growth rate of earnings?
b2. What would be he rate of return?
Mexican Motors’ market cap is 250 billion pesos. Next year’s free cash flow is 9.5 billion pesos. Security analysts are forecasting that free cash flow will grow by 8.50% per year for the next five years.a. Assume that the 8.50% growth rate is expected to continue forever. What rate of return are investors expecting? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
b-1. Mexican Motors has generally earned about 13% on book equity (ROE = 13%) and reinvested 50% of earnings. The remaining 50% of earnings has gone to free cash flow. Suppose the company maintains the same ROE and investment rate for the long run. What will be the growth rate of earnings? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal places.)
b-2. What would be the rate of return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
Assume that the economy can experience high growth, normal growth, or recession. Under
these conditions, you expect the following stock market returns for the coming year:
State of the Economy
High Growth
Normal Growth
Recession
Probability
0.2
0.7
0.1
Return
60%
18%
2%
a. Compute the expected value of a $1,000 investment over the coming year. If you invest
$1,000 today, how much money do you expect to have next year? What is the percentage
expected rate of return?
Instructions: Enter dollar values rounded to the nearest whole dollar and percentages rounded
to one decimal place.
The expected value is $
and the expected rate of return is
b. Compute the standard deviation of the percentage return over the coming year.
Standard deviation =
%
=
%.
c. If the risk-free return is 7 percent, what is the risk premium for a stock market investment?
Risk premium
%
Chapter 4 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 4 - Stock markets True or false? a. The bid price is...Ch. 4 - Stock quotes a. I would like to sell 1000 shares...Ch. 4 - Stock quotes Here is a small part of the order...Ch. 4 - Stock quotes Go to finance.yahoo.com and get...Ch. 4 - Valuation by comparables Look up P/E and P/B...Ch. 4 - Dividend discount model True or false? a. All...Ch. 4 - Dividend discount model Respond briefly to the...Ch. 4 - Dividend discount model Company X is expected to...Ch. 4 - Dividend discount model Company Y does not plow...Ch. 4 - Constant-growth DCF model Company Zs earnings and...
Ch. 4 - Prob. 11PSCh. 4 - Constant-growth DCF model Pharmecology just paid...Ch. 4 - Prob. 13PSCh. 4 - Cost of equity capital Under what conditions does...Ch. 4 - Cost of equity capital Each of the following...Ch. 4 - Two-stage DCF model Company Z-prime is like Z in...Ch. 4 - Two-stage DCF model Consider the following three...Ch. 4 - Two-stage DCF model Company Qs current return on...Ch. 4 - Two-stage DCF model Compost Science Inc. (CSI) is...Ch. 4 - Growth opportunities If company Z (see Problem 10)...Ch. 4 - Growth opportunities Alpha Corps earnings and...Ch. 4 - Prob. 24PSCh. 4 - Prob. 25PSCh. 4 - Prob. 26PSCh. 4 - Horizon value Suppose the horizon date is set at a...Ch. 4 - Valuing a business Permian Partners (PP) produces...Ch. 4 - Valuing a business Construct a new version of...Ch. 4 - Valuing a business Mexican Motors market cap is...Ch. 4 - Valuing a business Phoenix Corp. faltered in the...Ch. 4 - Constant-growth DCF formula The constant-growth...Ch. 4 - DCF valuation Portfolio managers are frequently...Ch. 4 - Valuing a business Construct a new version of...
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