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1.Suppose Footlocker’s Inc. Will pay dividends of $ 5, $7, $12, $9 for first four years respectively. Then it grows at the rate of 11 percent for next three years. Then it grows at the rate of 6 percent for next three years. What value you will place on this stock if investor requires nine percent return over the period?
2.Suppose Footlocker’s Inc. Will pay dividends of $ 5, $7, $12, $9 for first four years respectively. Then it grows at the rate of 11 percent for next three years. Then it grows at the rate of 6 percent for next three years. What value you will place on this stock if investor requires nine percent return over the period?
3.Mr. Mwila, a research analyst, has been hired to value Le AVIC Ltd., a company that is currently experiencing rapid growth and expansion. Mwila is an expert in the construction industry and has had extensive experience in valuing similar firms. He is convinced that a value for the equity of Le AVIC Ltd. can be reliably obtained through the use of a three-stage free cash flow to equity (FCFE) model with declining growth in the second stage. Based on up-to-date financial statements, he has determined that the current FCFE per share is K2. He has prepared a forecast of expected growth rates in FCFE as follows: Stage 1: 9% for years 1 through 3 Stage 2: 6.0% in year 4, 4.5% in year 5, 4.0% in year 6 Stage 3: 3.0% in year 7 and thereafter Moreover, Mwila has determined that the company has a beta of 1.4. The current risk-free rate is 4.0%, and the equity risk premium is 7.0%. Other financial information: Outstanding shares: 200 kwacha shares. Tax rate: 35.0% Interest expense: K30 000.00.
Create a spreadsheet to calculate the following:
i. the required rate of return
ii. the terminal value in year 6
iii. The per share value Mwila assigned to Le AVIC ltd
iv. The free cash flow to firm (FCFF)
1.
| Required rate= | 9.00% | ||||||
| Year | Previous year dividend | Dividend growth rate | Dividend current year | Horizon value | Total Value | Discount factor | Discounted value |
| 1 | 0 | 0.00% | 5 | 5 | 1.09 | 4.5872 | |
| 2 | 5 | 0.00% | 7 | 7 | 1.1881 | 5.89176 | |
| 3 | 7 | 0.00% | 12 | 12 | 1.295029 | 9.2662 | |
| 4 | 12 | 0.00% | 9 | 9 | 1.41158161 | 6.37583 | |
| 5 | 9 | 11.00% | 9.99 | 9.99 | 1.538623955 | 6.49281 | |
| 6 | 9.99 | 11.00% | 11.0889 | 11.0889 | 1.677100111 | 6.61 | |
| 7 | 11.0889 | 11.00% | 12.308679 | 434.907 | 447.215679 | 1.828039121 | 244.64229 |
| Long term growth rate (given)= | 6.00% | Value of Stock = | Sum of discounted value = | 283.87 | |||
| Where | |||||||
| Current dividend =Previous year dividend*(1+growth rate)^corresponding year | |||||||
| Unless dividend for the year provided | |||||||
| Total value = Dividend + horizon value (only for last year) | |||||||
| Horizon value = Dividend Current year 7 *(1+long term growth rate)/( Required rate-long term growth rate) | |||||||
| Discount factor=(1+ Required rate)^corresponding period | |||||||
| Discounted value=total value/discount factor |
2.
| value you will place on this stock is $65.07 | ||||
| Statement showing Current Price | ||||
| Particulars | Time | PVf 9% | Amount | PV |
| Cash inflows (Dividend) | 1.00 | 0.9174 | 5.00 | 4.59 |
| Cash inflows (Dividend) | 2.00 | 0.8417 | 7.00 | 5.89 |
| Cash inflows (Dividend) | 3.00 | 0.7722 | 12.00 | 9.27 |
| Cash inflows (Dividend) | 4.00 | 0.7084 | 9.00 | 6.38 |
| Cash inflows (Dividend) | 5.00 | 0.6499 | 9.99 | 6.49 |
| Cash inflows (Dividend) | 6.00 | 0.5963 | 11.09 | 6.61 |
| Cash inflows (Dividend) | 7.00 | 0.5470 | 12.31 | 6.73 |
| Cash inflows (Dividend) | 8.00 | 0.5019 | 13.05 | 6.55 |
| Cash inflows (Dividend) | 9.00 | 0.4604 | 13.83 | 6.37 |
| Cash inflows (Dividend) | 10.00 | 0.4224 | 14.66 | 6.19 |
| Current Price of Stock | 65.07 | |||
3.
1. Required rate of return: As per the given information in the question the required return to be calculated using the Capital Asset Pricing Model(CAPM) whose formula is Rf+(Rm-Rf)Beta, Hint= Rm-Rf is a Rish premium.
So all information given in the question 4+(7)x1.4 = 4+9.8 = 13.8%
2. Terminal Value in Year 6 : We need to use Gordan growth formula to calculte here terminal value.
Gorgan growth formula =
P0 is Price today, D1 is Dividend at the end of year 1, Ke= Required rate of return, G= Growth
And we can Use FCFE(Free Cash flow to equity) here as Dividend because both represent the reidual part of profit after deducting all costs.
Question ask terminal value at te end of Year 6 so Rewriting the above formula as per question is
FCFE need here to calculate using growth rates given in question, compound the FCFE with rates.
Terminal Value at T6= 23.98
3) Per Value Share
Now calculate value of share by calculating the present Value of all future cash flows using Ke as required rate of return.
Calculation in Spreadsheet looks as:
| Year | FCFE | PV Factor @ 13.8% | Present Value |
| 1 | 2.0600 | 0.8787 | 1.8102 |
| 2 | 2.1218 | 0.7722 | 1.6384 |
| 3 | 2.1855 | 0.6785 | 1.4829 |
| 4 | 2.3166 | 0.5963 | 1.3813 |
| 5 | 2.4208 | 0.5239 | 1.2684 |
| 6 | 2.5177 | 0.4604 | 1.1592 |
| 6 | 23.9800 | 0.4604 | 11.0407 |
| Total | 19.7810 |
So Value per share is 19.78.
4) Free Cash Flow to firm
Just look at the Finance sheet for calulation:
| Earning Before Interest and Taxes ( EBIT) | xxx |
| Less: Interest | xxx |
| Earning before taxes | xxx |
| Less:Taxes | xxx |
| Earning avaible for Equity i.e. FCFE | xxx |
We need to reverse calculate to reach EBIT which would be as Free Cash flow to Firm FCFF.
FCFE = 19.78 x 200( oustanding share) = 3956
Tax adjustment @ 35% , So 3956/(1-.35) , 3956/.65, = 6086.15 is earnings before taxes
Now add back the interest cost as given in question 30,000
So FCFF would be 6086.15+30000 = 36086.15.
please see the attached filel.
