FINANCE-Financial Management Excel Project.

QUESTION

Chapter 9. Comprehensive/Spreadsheet
problem

Taussig
Technologies Corporation (TTC) has been growing at a rate of 20% per year in
recent years. This

same
growth rate is expected to last for another 2 years, then to decline to gn = 6%.

a. If D0 = $1.60 and rs = 10%,what is TTC’s stock worth
today? What are its expected dividend

and capital gains yields at this time,
that is, during Year 1?

1.
Find the price today.

D0
$1.60

rs
10.0%

gs
20%
Short-run g; for Years
1-2 only.

gn
6%
Long-run g; for Year 3
and all following years.

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20%

6%

Year
0
1
2
3

Dividend
$1.6000

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PV of dividends

= Horizon value = P2 =

= rs
– gn

= P0

2.
Find the expected dividend yield.

Recall
that the expected dividend yield is equal to the next expected annual
dividend divided by the price at

the
beginning of the period.

Dividend yield =
D1
/
P0

Dividend yield =

/

Dividend yield =

3.
Find the expected capital gains yield.

The
capital gains yield can be calculated by simply subtracting the dividend
yield from the expected

total return.

Cap. gain yield =
Expected total return
−
Dividend yield

Cap. gain yield =
10.0%
−

Cap. gain yield =

b. Now assume that TTC’s period of
supernormal growth is to last for 5 years rather than 2 years.

How would this affect the price,
dividend yield, and capital gains yield?

1. Find the price today.

D0
$1.60

rs
10.0%

gs
20%
Short-run g; for Years
1-5 only.

gn
6%
Long-run g; for Year 6
and all following years.

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20%

6%

Year
0
1
2
3
4
5
6

Dividend
$1.6000

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PV of dividends

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= Horizon value = P5 =

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= P0

= rs
− gn

Part
2. Find the expected dividend yield.

Dividend yield =
D1
/
P0

Dividend yield =

/

Dividend yield =

Part
3. Find the expected capital gains yield.

Cap. gain yield =
Expected total return
–
Dividend yield

Cap. gain yield =
10.0%
–

Cap. gain yield =

d. TTC recently introduced a new line of
products that has been wildly successful.
On the basis of this

success and anticipated future success,
the following free cash flows were projected:

Year
FCF (in millions)

1
$5.5

2
$12.1

3
$23.8

4
$44.1

5
$69.0

6
$88.8

7
$107.5

8
$128.9

9
$147.1

10
$161.3

After the 10th year, TTC’s financial
planners anticipate that its free cash flow will grow at a constant rate

of 6%.
Also, the firm concluded that the new product caused the WACC to fall
to 9%. The market value

of TTC’s debt is $1,200 million, it uses
no preferred stock, and there are 20 million shares of common

stock outstanding. Use the corporate valuation model approach
to value the stock.

INPUT
DATA: (Dollars in Millions)

WACC

9%

gn

6%

Millions
of shares
20

MV of debt

$1,200

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Year

0
1
2
3
4
5
6
7
8
9
10
11

FCF’s
$5.5
$12.1
$23.8
$44.1
$69.0
$88.8
$107.5
$128.9
$147.1
$161.3

PV of FCF’s

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PV of FCF1-10
=

HV
at Year 10 of FCF after Year 10 = FCF11/(WACC–
gn):

PV
of HV at Year 0 = HV/(1+WACC)10:

Sum
= Value of the Total Corporation

Less:
MV of Debt and Preferred

Value
of Common Equity

Number
of Shares (in Millions) to Divide By:

Value
per Share = Value of Common Equity/No. Shares:

versus

using the discounted

dividend model

The
price as estimated by the corporate valuation method differs from the
discounted dividends method because

different
assumptions are built into the two situations. If we had projected financial statements,
found both

dividends
and free cash flow from those projected statements, and applied the two
methods, then the

prices
produced would have been identical. As it stands, though, the two prices were
based on somewhat

different
assumptions, hence different prices were obtained. Note especially that in the FCF model we

assumed
a WACC of 9% versus a cost of equity of 10% for the
discounted dividend model. That would obviously tend to

raise the price.

 

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