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# Using data from our fictitious Company, AB 217 (from Unit 3),

### Resolved Question:

Using data from our fictitious Company, AB 217 (from Unit 3), We will calculate the
expect value of its stock using the Constant Growth Model (page 114): Po = D1/(r - g)
To do that we will have to estimate the vales of r, g, and D1.
To estimate the value of r we will use the Capital Asset Pricing Model:
CAPM = Rf + Beta(Rm - Rf)
Where:
Risk Free Rate = Rf = 3.5%
Market Return = Rm = 12%
Beta of BA 217 Corp. = .85
Question 1: Calculate "r".
Next we estimate the value of "g" using the average growth rate of past dividends.
Assume 6 years ago AB 217 paid a dividend of \$1.20 and this year they paid a dividend
of \$1.55, using the Excel RATE formula calculate the average growth rate it took for the
dividend to the current level in the period of time.
Question 2: Calculate "g".
Next we estimate the value of D1, the dividend next year as required by the Constant
Growth Model.
D1 = Do(1 + g), where Do = the dividend today, \$1.55
Unit 6 [Finance]
2
Question 3: Calculate "D1".
Using your solutions estimate the value of AB 217 Corporation's stock using the
Constant Growth Model.
Po = D1/(r - g)
Question 4: Calculate the estimated value or Price Today of AB 217 = "Po".
Finally comment on this question. If the actual market value was BELOW your
estimated value of AB217, and you were highly confident in your assumptions, what
action might you take?
show work
company info:

Company X Income Statement for the Period Ended of 12/31/2010
(in millions)
Net sales \$87,500
Cost of Goods Sold 81,813
Gross Margin 5,687
Depreciation 1,531
Earnings Before Interest and Taxes (EBIT) 4,156
Interest Expense 1,375
Earnings before taxes (EBT) 2,781
Taxes 973
Net income \$ 1,808
Company X Balance Sheet as of 12/31/2010
(in millions)
Current Assets Current Liabilities
Cash 104\$ Accounts Payable 232\$
Accounts Receivable 455 Notes Payable 196
Inventory 553
Total Current Assets 1,112 Total Current Liabilities 428
Net Fixed Assets 1,644 Long Term Debt 408
Total Assets 2,756\$ Total Liabilities 836
Owners Equity
Common Stock 600
Retained Earnings 1,320
Total Common Equity 1,920
Total Liabilities and
Owners Equity 2,756\$
Other Information
Number of Shares Outstanding 76.80 Million
(Market) Current Share Price 78.62\$ per share

Using data from our fictitious company, we are going to calculate the expect value of its stock using the Constant
Growth Model (page 114): Po = D1 / (r – g). To do that we will have to estimate the vales of r, g, and D1.

Question 1: Calculate "r" Formulas Needed
Where:
Risk Free Rate (Rf) in % =
Market Return (Rm) in % =
Beta =
CAPM = r = <-------- CAPM = (Rf + Beta x (Rm – Rf)) / 100

Question 2: Calculate "g"
Estimated value of “g” (%) = <-------------------- =(RATE(6,,-1.2,1.55) / 1)*100

Question 3: Calculate "D1"
Where:
Do (\$) = \$1.55
g = 0.0000
Estimated value of “D1” = <------------------------------------- P1 = Do x (1 + g)

Question 4: Calculate "P0"
Where:
D1 (from B24) = 0
r (from B13) = 0.0000
g (from B23) = 0.0000
Po (\$) = <-------------------------------------- Po = D1 / (r – g)

Comment:
Actual Market Value = \$25.00
Estimated Value = 0

Question: If the actual market value was BELOW your estimated value of AB217, and you were highly confident in your assumptions, what action might you take?
Submitted: 5 years ago.
Expert:  Annie Kavitha replied 5 years ago.

Hi,

Customer: replied 5 years ago.
Customer: replied 5 years ago.
are you still continuing to work on the information
Expert:  Annie Kavitha replied 5 years ago.

HelloCustomer

Click on the link below for solution.

http://www.mediafire.com/?hr38rlhhh5qs5cb