Control 10 2016-1

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Nombre___________________
		Nombre___________________
PONTIFICIA UNIVERSIDAD CATOLICA DE CHILE
FACULTAD DE CIENCIAS ECONOMICAS Y ADMINISTRATIVAS
FINANZAS I (EAA 220 B)
Control 10
Primer Semestre 2016							Profesor:	Ignacio Alvarez
Total: 16 puntos							Ayudantes:	Eduardo Busch 
Tiempo: 16 minutos							Camila Echeverría
 						Abel García-Huidobro	
1) (4 puntos) High Flyer Industries has just paid its annual dividend of $3 per share. The dividend is expected to grow at a constant rate of 8% indefinitely. The beta of High Flyer stock is 1,0, the risk-free rate is 6%, and the market risk premium is 8%. What is the intrinsic value of the stock? What would be your estimate of intrinsic value if you believed that the stock was riskier, with a beta of 1,25?
Because a $3 dividend has just been paid and the growth rate of dividends is 8%, the forecast for the year-end dividend is $3 3 1.08 5 $3.24. The market capitalization rate is 6% + (1 x 8%) = 14%. Therefore, the value of the stock is
V0 = 	D1	=	$3.24		=	$54
k-g		0.14-0.08
If the stock is perceived to be riskier, its value must be lower. At the higher beta, the market capitalization rate is 
6% + (1.25 x 8% )= 16%, and the stock is worth only
V0 = 	D1	=	$3.24		=	$40,50
k-g		0,16-0,08
2) (4 puntos) Takeover Target is run by entrenched management that insists on reinvesting 60% of its earnings in projects that provide an ROE of 10%, despite the fact that the firm’s capitalization rate is k=15%. The firm’s year-end dividend will be $2 per share, paid out of earnings of $5 per share. At what price will the stock sell? What is the present value of growth opportunities? Why would such a firm be a takeover target for another firm?
Given current management’s investment policy, the dividend growth rate will be
g = ROE x b = 10% x 0.6 = 6%
and the stock price should be
P0 = 	 $2		=	$22.22
 0,15 - 0,06
The present value of growth opportunities is
PVGO = (Price per share) – (No-growth value per share)
= $22,22 – (E1/k) = $22.22 – ($5/0,15 ) = -$11,11
PVGO is negative. This is because the net present value of the firm’s projects is negative: The rate of return on those assets is less than the opportunity cost of capital.
Such a firm would be subject to takeover, because another firm could buy the firm for the market price of $22.22 per share and increase the value of the firm by changing its investment policy. For example, if the new management simply paid out all earnings as dividends, the value of the firm would increase to its no-growth value:
(E1 / k ) = $5 / 0,15 = $33,33
3) (4 puntos) The risk-free rate of return is 8%, the expected rate of return on the market portfolio is 15%, and the stock of Xyrong Corporation has a beta coefficient of 1.2. Xyrong pays out 40% of its earnings in dividends, and the latest earnings announced were $10 per share. Dividends were just paid and are expected to be paid annually. You expect that Xyrong will earn an ROE of 20% per year on all reinvested earnings forever.
a) What is the intrinsic value of a share of Xyrong stock?
b) If the market price of a share is currently $100, and you expect the market price to be equal to the intrinsic value 1 year from now, what is your expected 1-year holding-period return on Xyrong stock?
a.	k = rf + b[E(rM) – rf] = 8% + 1,2(15% – 8%) = 16,4%
 		g = b x ROE = 0,6 x 20% = 12%
		V0 = $10 x 0,4 x (1+12%) = $101.82
			(16,4% - 12%)
b.	P1 = V1 = V0 x (1 + g) = $101.82 ´x 1.12 = $114,0384
		E(r) =	{ $114,0384 + [ ($10 x 0,4 x (1+12%) ] }	=	18,5184%	= 18,52%
				$100
4) (4 puntos) The MoMi Corporation’s cash flow from operations before interest and taxes was $2 million in the year just ended, and it expects that this will grow by 5% per year forever. To make this happen, the firm will have to invest an amount equal to 20% of pretax cash flow each year. The tax rate is 34%. Depreciation was $200,000 in the year just ended and is expected to grow at the same rate as the operating cash flow. The appropriate market capitalization rate for the unleveraged cash flow is 12% per year, and the firm currently has debt of $4 million outstanding. Use
the free cash flow approach to value the firm’s equity.
									Projected Free Cash Flow in Year 1
	Before-tax cash flow from operations				$2,100,000
	Depreciation							 210,000
	Taxable Income							 1,890,000
	Taxes (@ 34%)							 642,600
	After-tax unleveraged income					 1,247,400
	After-tax cash flow from operations				 	 1,457,400
	New investment (20% of cash flow from operations)		 420,000
	Free cash flow							 1,037,400
	k = 12% , g = 5%
 	
The value of the whole firm, debt plus equity, is
									V0 = 1.037.40 = $14,820,000
			 							12% - 5%
	
Since the value of the debt is $4 million, the value of the equity is $10,820,000.
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