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# VALUATION OF

SECURITIES: STOCKS
ACC09 FINANCIAL MANAGEMENT
PART 2

VALUE OF ASSET
present value of all the
assets future cash flows

## VALUE OF STOCK: BASIC

present value of all the
stocks future cash flows

VALUE OF STOCK:
DIVIDEND GROWTH
MODEL

Total Return =
Dividend Yield + Capital
Yield
Total Return =
D1 /P0 + (P1 P0)/P0
ks = D1 /P0 + g

EXERCISE 1

## Frostfell Airlines is expected to

pay an upcoming dividend of
P3.29. The companys dividend
is expected to grow at a
steady, constant rate of 5%
well into the future. Frostfell
currently has 1,600,000 shares
of common stock outstanding.
If the required rate of return for
Frostfell is 12%, what is the
best estimate for the current

EXERCISE 2

## Blair Brothers' stock currently has a

price of P50 per share and is
expected to pay a year-end
dividend of P2.50 per share (D1 =
P2.50). The dividend is expected to
grow at a constant rate of 4 percent
per year. The company has
insufficient retained earnings to
fund capital projects and must,
therefore, issue new common stock.
The new stock has an estimated
flotation cost of P3 per share. What
is the company's cost of equity

EXERCISE 3

## Grateway Inc. has a weighted

average cost of capital of 11.5
percent. Its target capital structure
is 55 percent equity and 45 percent
debt. The company has sufficient
retained earnings to fund the equity
portion of its capital budget. The
before-tax cost of debt is 9 percent,
and the company's tax rate is 30
percent. If the expected dividend
next period (Dl) is P5 and the
current stock price is P45, what is
the company's growth rate?

## VALUE OF STOCK: NONCONSTANT GROWTH

STOCK
Last year, Firm A paid P4.00 in
annual dividends. This year, a ten
percent increase is expected. What
if there is an expected return from
common shares in the amount of
12%, and that the dividends are
expected to grow by 10% per year
for the next two years, after which
the dividends shall move steadily at
5%, at how much should the stocks
be sold initially this year?

## VALUE OF STOCK: NONCONSTANT GROWTH

STOCK
Last year, Firm A paid P4.00 in annual dividends. This
year, a ten percent increase is expected. What if there is
an expected return from common shares in the amount
of 12%, and that the dividends are expected to grow by
10% per year for the next two years, after which the
dividends shall move steadily at 5%, at how much
should the stocks be sold initially this year?

STOCK

STOCK

STOCK

STOCK

## VALUE OF STOCK: PRICEEARNINGS

Price-Earnings ratio is in
substance the reciprocal of
return on investment.
Given a P/E ratio at a
respective point in time and
predicting the EPS will allow
estimation of stocks price:

EXERCISE 5

Examine the value of the firm based on the priceearnings (P/E) ratio model. Since the company is
privately traded (not in the public stock market),
you will get your anticipated P/E ratio by taking
the average value of five publicly traded chemical
companies.

P/E Ratio:

Dow Chemical 15

Du Pont
18

Georgia Gulf 7

3M
19

Olin Corp.
21
Assume Dunning Chemical has earnings
per share of P2.10. What is the stock

## VALUE OF STOCK: PRICEEARNINGS

Remember that when a high P/E ratio
is registered:
1. It is an indication of positive
expectations for the future of the
company
2. It means the stock is more
expensive relative to earnings
3. It typically represents a
successful and fast-growing
company
4. The companys stock is called a

## VALUE OF STOCK: PRICEEARNINGS

However, a stock with a low P/E ratio:
1. It indicates negative expectations
for the future of the company
2. It may suggest that the stock is a
better value or buy
3. The companys stock is called
value stock

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