Question 1
Exhale is expected to pay a $0.60 dividend next year. The dividend is expected to grow at a 50 percent
annual rate for Years 2 and 3, at 20 percent annually for Years 4 and 5, and at 5 percent annually for Year
6 and thereafter. If the required rate of return is 12 percent, what is the value per share?
(b) EB Systems is selling for $11.40 and is expected to pay a $0.40 dividend next year. The
dividend is expected to grow at 15 percent for the following four years, and then at 7 percent annually
after Year 5. If purchased at its current price, what is the expected rate of return on EB Systems? Assume
price equals value.
(c) Hanson PLC (LSE: HNS) is selling for $472. Hansen has a beta of 0.83 against the
FTSE 100 index, and the current dividend is $13.80. The risk-free rate of return is 4.66 percent, and the
equity risk premium is 4.92 percent. An analyst covering this stock expects the Hanson dividend to grow
initially at 14 percent but to decline linearly to 5 percent over a 10-year period. After that, the analyst
expects the dividend to grow at 5 percent.
Required
(a) Compute the value of the Hanson dividend stream using the H-model. According to the H-model
valuation, is Hanson overpriced or underpriced?
(b) Assume that Hanson’s dividends follow the H-model pattern the analyst predicts. If an investor
pays the current $472 price for the stock, what will be the rate of
return?
Question 2
Pham is evaluating Phaneuf Accelerateur using the FCFF and FCFE valuation approaches. Pham has
collected the following information (currency in RTGS:
• Phaneuf has net income of 250 million, depreciation of 90 million, capital expenditures of 170
million, and an increase in working capital of 40 million.
• Phaneuf will finance 40 percent of the increase in net fixed assets (capital expenditures less
depreciation) and 40 percent of the increase in working capital with debt financing.
• Interest expenses are 150 million. The current market value of Phaneuf ’s outstanding debt is
1,800 million.
• FCFF is expected to grow at 6.0 percent indefinitely, and FCFE is expected to grow at 7.0 percent.
• The tax rate is 30 percent.
• Phaneuf is financed with 40 percent debt and 60 percent equity. The before-tax cost of debt is 9
percent and the before-tax cost of equity is 13 percent.
• Phaneuf has 10 million outstanding shares.
Required
(a) Using the FCFF valuation approach, estimate the total value of the firm, the total
market value of equity, and the value per share.
(b) Using the FCFE valuation approach, estimate the total market value of equity and
the value per share.
Expert Answer
(A) EBIT = € 507 million, Tax Rate = 30 % Net Operating Profit After-Tax = NOPAT = EBIT x (1-Tax Rate) =
507 x (1-0.3) = c 354.9 million FCFF = NOPAT + Depreciation – Capital Expenditure – Increase in Net Working
Capital (NWC) = 354.9
