NEXT UP QUESTION PAPER2016

Team Name:
Names of all Team Members:
College:
Maximum Marks:
75
Deadline: 8pm, 24th July 2016
N. B. Include a small paragraph of approx. 3-5 lines with the assumptions and
the procedure at broad-level for each question. Comprehensive instructions have
already been given in a separate document.
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Problem 1:
(15
Marks)
For five utility stocks, the table below provides the expected dividend for next
year, the current market price, the expected dividend growth rate, and the beta.
The risk free rate is currently 5.4%, and the market risk premium is 6.1%.
Stock
Stock 1
Stock 2
Stock 3
Stock 4
Stock 5

Dividen
d

Price

Dividend
Growth Rate

Beta

2.50
2.10
2.69
1.3
2.8

48.17
37.80
74.12
28.25
62.13

5.0
4.5
7.0
5.5
5.5

0.60
0.70
0.80
0.65
0.6

1. Calculate the expected rate of return for each stock using the Gordon
growth model.
2. Calculate the required rate of return for each stock using the CAPM.
Problem 2:
(15
Marks)
SNS Company currently sells for $35.50 per share. In an attempt to determine if
SNS is fairly priced, an analyst has assembled the following information:
The before-tax required rates of return on SNS debt, preferred stock, and
common stock are 8.0%, 6.8%, and 13.0%, respectively.
The company's target capital structure is 25% debt, 15% preferred stock,
and 60% common stock.

The market value of the company's debt is $160 million, and its preferred
stock is valued at $68 million.
SNS's FCFF for the year just ended is $28 million. FCFF is expected to grow
at a constant rate of 4% for the foreseeable future.
The tax rate is 35%.
SNS has 8 million outstanding common shares.

1. What is SNS's estimated value per share?

2. Is SNS's stock underpriced?

Problem 3:
(10
Marks)
David Bierman has valued the operating assets of Menthol Milling at $810
million. The company also has short-term cash and securities with a market
value of $90 million. The noncurrent investments have a book value of $30
million and a market value of $60 million. The company also has an overfunded
pension plan, with plan assets of $210 million and plan liabilities of $180 million.
Menthol Milling has $215 million of notes and bonds outstanding and 200 million
outstanding shares. What is the value per share?

Problem 4:
(15
Marks)
An analyst plans to use P/E and the method of comparables as a basis for
recommending one of two peer group companies in the personal digital assistant
business. Data on the companies' prices, trailing EPS, and expected growth rates
in sales (five-year compounded rate) are given in the table below. Neither
business has been profitable to date, and neither is anticipated to have positive
EPS over the next year.
Company
Raichu
Pikachu

Price

Trailing
EPS

P/E

Expected Growth
(Sales)

$21
$11

-$2.20
-$1.35

NM
NM

45%
40%

Unfortunately, because the earnings for both companies were negative, the P/Es
were not meaningful. On the basis of the above information, answer the following
questions.
1. State how the analyst might make a relative valuation in this case.
2. Which stock should the analyst recommend?

Problem 5:
Marks)

(10

Discuss three types of investment scenarios for which one can appropriately use
P/B in valuation.

Problem 6:
(10
Marks)
NS Telecom Co. is a cellular telephone paging and computer communication
services company in Seoul, South Korea. The company is traded on the Korea,
New York, and London stock exchanges. Sol Kim has estimated the normalized
FCFE for NS Telecom to be 1,200 Korean won (per share) for the year just ended.
The real country return for South Korea is 7.75%. To estimate the required return
for NS Telecom, the adjustments to the real country return are an industry
adjustment of +0.70%, a size adjustment of -0.15%, and a leverage adjustment
of +0.3%. The long-term real growth rate for South Korea is estimated at 3.5%,
and Kim expects the real growth rate of NS Telecom to track the country rate.
1. What is the real required rate of return for NS Telecom?
2. Using the single-stage FCFE valuation model and real values for the
discount rate and FCFE growth rate, estimate the value of one share of NS
Telecom.