Worksheet on Company Valuation

Worksheet on Company Valuation  The average P/E ratio in a particular industry is 12. Use this to value the stock of a company in that industry with earnings of $2/share. Price = 12*$2 = $24  A company has a P/E ratio of 15 and is growing at 12%, what is the PEG ratio? PEG = (P/E)/G = 15/12 = 1.25  What is the expected return from investing in a stock with a dividend yield of 5% that is expected to grow at 7%? k = D1/P0 + g k = 5% + 7% = 12%  A company’s next annual dividend is $2 per share. If you expect dividends to grow indefinitely at 4% and future cash flows are discounted at 12%, what is a share worth. V0 = D1/(k‐g) = $2/(0.12‐0.04) = 25  A company’s last annual dividend was $2 per share. If you expect dividends to grow indefinitely at 4% and future cash flows are discounted at 12%, what is a share worth. V0 = D0(1+g)/(k‐g) = $2(1.04)/(0.12‐0.04) = $26  A company’s next dividend is $3 per share. If you expect dividends to grow indefinitely at 2%, the risk‐ free rate is 1%, Beta = 1.4, expected market return is 10%, what is a share worth? E(Ri) = Rf + β(E(Rm)‐Rf) 0.136 = 0.01+1.4(0.1‐0.01) Value = $3/(0.136‐0.02) = $25.86  A company expects dividends per share of $1, $1.50 and $1.90 over the next three years with dividends growing at 5% per year after that. What is the value of a share discounting at 10%? V0 = D1/(1+k) +D2/(1+k)2 + D3/(1+k)3 + D4/(1+k)4 + … V0 = D1/(1+k) +D2/(1+k)2 + D3/(1+k)3 + P3/(1+k)3 P3 = D4/(k‐g) = 1.9*1.05/(0.10‐0.05) = 39.9 V0 = 1/1.1 + 1.5/1.12 + 1.9/1.13 + 39.9/1.13 = 33.55  A company has an ROE of 15%, has a payout rate of 30% and will have earnings next year of $6/share. If cash flows are discounted at 12%, what should be the firm’s forward‐looking P/E ratio and price per share assuming a sustainable growth rate? P/E = b/(k‐(1‐b)ROE) P/E = 0.3/(0.12‐0.7*0.15) = 20 P = 20*6 = 120  A company will have earnings next year of $4/share. Assuming an ROE of 14% and a discount rate of 10%, find the Present Value of Growth Opportunities (PVGO) assuming the company follows a sustainable growth rate and reinvests 40% of its earnings. P0 = (No‐Grow Value) + PVGO No‐Grow Value = 4/0.1 = 40 P0 = 0.6*4/(0.1‐0.4*0.14) = 54.55 PVGO = 54.55 – 40 = 14.55 Questions 1) A company’s next annual dividend is $4 per share. If you expect dividends to grow indefinitely at 2% and future cash flows are discounted at 9%, what is a share worth? 2) A company has an ROE of 12%, has a payout rate of 40% and will have earnings next year of $10/share. The risk‐free rate is 3%, Beta = 0.8, expected market return is 12%, what should the forward‐ looking P/E ratio be? 3) A company expects dividends per share of $2 and $2.50 over the next two years with dividends growing at 3% per year after that. What is the value of a share discounting at 8%? Answers 1) 57.14 2) 13.33 and a price of 133.33 3) 48.15