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Answer: Sales Shares Net Profit Margin Dividend Payout Ratio P/E Ratio Forecasting P8-1

Larry and Curley are brothers who use different valuation models to value the same stock. Larry uses the dividend valuation model while Curley uses the free cash flow to equity model. They are valuing American Home Care Products which pays a $2.50 dividend per share and has $1 million in free cash flow currently, with 5% expected growth and a 12% required return. Using these inputs, both brothers value the stock at $37.50 per share.

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Kristo Febrian Suwena -
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258 views

Answer: Sales Shares Net Profit Margin Dividend Payout Ratio P/E Ratio Forecasting P8-1

Larry and Curley are brothers who use different valuation models to value the same stock. Larry uses the dividend valuation model while Curley uses the free cash flow to equity model. They are valuing American Home Care Products which pays a $2.50 dividend per share and has $1 million in free cash flow currently, with 5% expected growth and a 12% required return. Using these inputs, both brothers value the stock at $37.50 per share.

Uploaded by

Kristo Febrian Suwena -
Copyright
© © All Rights Reserved
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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Forecasting

Answer :
P8-1 : Sales
An investor in Amman, Jordan, estimates that next year’s sales Shares
for Amman Intercontinental Hotels, Inc. would amount to Net Profit Margin
about 150 million Jordanian dinar. The company has 10 million
Dividend Payout Ratio
shares outstanding, generates a net profit margin of about
15%, and has a payout ratio of 40%. All figures are expected to P/E ratio
hold for next year. Given this information, compute the
following:
a. Estimated net earnings for next year
b. Next year’s dividends per share
c. The expected price of the stock (assuming the P/E ratio is
24.5 times earnings)
d. The expected holding period return (latest stock price: 40
Jordanian dinar per share)
150,000,000 a. Estimated Net Earnings 22500000
10,000,000 b. Dividend per share 0.9
15% c. Expected Price of Stock $ 55.13
40% d. Expected holding period return 40.06%
24.5
DVM: Zero Growth Answer :
P8-10 : Annual Dividend $ 2.00
Danny is considering a stock purchase. The stock Rate of Return 12%
pays a constant annual dividend of $2.00 per share
and is currently trading at $20. Danny’s required Value of a share of stock $ 17
rate of return for this stock is 12%. Should he buy
this stock?

Harga wajar saham adalah 17 dolar


sedangkan saham diperdagangkan pada
harga 20 dolar yang artinya saham tersebut
overpriced. Jadi, sebaiknya tidak dibeli.
alah 17 dolar
erdagangkan pada
tinya saham tersebut
knya tidak dibeli.
DVM & FCF to Equity: Constant Growth

P8-11 : Answer :
Larry and Curley are brothers. They’re both serious Current Dividend
investors, but they have different approaches to valuing Current free cash flow
stocks. Larry, the older brother, likes to use the dividend Expected growth rate
valuation model. Curley prefers the free cash flow to
equity valuation model. Required rate of return
Shares outstanding
As it turns out, right now, both of them are looking at the
same stock—American Home Care Products, Inc. (AHCP).
The company has been listed on the NYSE for over 50
Larry Valuation
years and is widely regarded as a mature, rock-solid,
dividend-paying stock. The brothers have gathered the Value/share $ 37.5
following information about AHCP’s stock:
Current dividend (D0) = $2.50/share Curley Valuation
Current free cash flow (FCF0) = $1 million Value/share $ 37.5
Expected growth rate of dividends and cash flows (g) =
5.0% Required rate of return (r) = 12.0%
Shares outstanding = 400,000

How would Larry and Curley each value this stock?


$ 2.50 per share
1,000,000
5%
12%
400,000

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