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Homework answers / question archive / 1)Two-Phase Stock Valuation 2: The current dividend for Cisco Systems is $1

1)Two-Phase Stock Valuation 2: The current dividend for Cisco Systems is $1

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1)Two-Phase Stock Valuation 2: The current dividend for Cisco Systems is $1. Suppose that analysts believe that Cisco's dividends for the next 5 years will grow at 15%. After the fifth year, analysts expect revenues (and dividends) for the company to grow at 5% forever. The required return for Cisco given its relevant risk is 18%. What should the current price for Cisco stock be? 1. Estimate value of Phase I dividends. 2. Estimate value of Phase II dividends. 3. Find PV of Phase II dividends.

2) Calculate the initial price of a price-weighted index that comprises both stocks A and B. 2. Calculate the final price of the same price-weighted index that comprises both stocks A and 3. Find the percentage change in the price weighted average of the two stocks 4 Calculate the final price of a market value weighted index that comprises A and B (assume that the initial price of the index is 100). 5. What is the percentage change of the value weighted index? Assume now that at t-0, stock B undergoes a 2 for 1 split (see new table below): Stock Initial Price (t-0) Final Price (1) Number of shares in millions) A 18 20 30 10 4 B 35 the price inted indey
Assume now that at t=0, stock B undergoes a 2 for 1 split (see new table below): Stock Initial Price (1-0) Final Price (t-1) Number of shares (in millions) A B 20 30 18 35 10 4 6- What is the new divisor for the price-weighted index? 7. Calculate the percentage change in the adjusted price-weighted index after the stock split. % 7. Calculate the percentage change in the value-weighted index after the stock split.

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1)

Current Dividend 1        
Phase 1 growth rate 0.15        
Phase 2 growth rate 0.05        
Discount rate (r) 0.18        
           
Time (N) 1 2 3 4 5
Dividend at the end of each year increases by 15% 1.15 1.3225 1.520875 1.749006 2.011357
Discount factor is given by (1/((1+r)^N)) 0.847458 0.718184 0.608631 0.515789 0.437109
Present value is dividends at each year multiplied by discount factor at each year 0.974576 0.949799 0.925651 0.902118 0.879183
Sum of Phase 1 dividends is adding all the present values 4.631327        
           
1) Value of Phase 1 Dividends 4.631327        
           
Phase 2 Dividends          
Dividends will grow at 5% after end of 5th year till every year          
Here we will calculate terminal vale given by (Dividend at year 5*(1+0.05))/(r-g) 16.24558        
           
Terminal value (which is value of phase 2 dividends ) will be received by investor at the end of year 5 16.24558        
           
2) Phase 2 dividends 16.24558        
           
3) Present value of phase 2 dividends is 16.24558*0.437109 7.101093  

2) 

Part 1

  1. Calculating initial Price weighted index comprising of stock A and B at period (t) 0 = price of stock A + Price B / number of stock = 20 + 60 / 2 =40
  2. Final Weighted index comprising of stock A and stock B at period (t) 1 = 18 + 70 / 2 = 44
  3. Percentage change in price weighted average of two stocks = (Final price weighted index/ Initial price weighted index ) -1 = 44/40 -1 = 10%
  4. Final market Value weighted index comprising of stock A and B = ( price of stock A * number of share ) + ( Price of stock B * number of share ) = 320 where in weight of stock A = 56% and stock B is 44 %

Percentage change in value weighted index = 0% if we assume the initial price of stock A and B but if we assume the initial price of the index 100 then % change would be 320 /100*12 = -73.33

Part 2

Now at period (t) 0 the stock B goes into a split for 2 :1 i.e 2 stock for 1 stock.

  1. Assuming price weighted index for period (t) 1 remaining the same = 44 = Price of stock A + Price of stock B / Divisor =44 =35 +18 / divisor = 1.2
  2. After stock split the adjusted price weighted index = 18 + 35 / 2 =26.5 , therefore after split the percentage change in price index = 26.5/44 -1 = -66% but if we use the devisor as 1.2 the price weighted index will remain unchanged even after the split.
  3. After the split the change in value weighted index = 0 % as the number of shares of stock B increased to 4 from 2 due to the split and it adjusted any changes as 70*2 = 35 *4 = 140 , thus no change occurs in value weighted average.

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