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Claire Anne E.Sulam 4A2 Integrated Case : Ping An Insurance (Group) Company Ltd.

Stock Valuation

1. What are the legal rights and privileges of a common stockholder? - Being the real owners of the company, stockholders have some rights and privileges such as: a. Common stockholders have the right to share in company's earnings and have a claim on assets after paying all it b. Common Stockholders can attend general meetings of the company and cast a vote through himself or proxy. c. Common Stockholders can control the firm since they have the right to elect the board of directors of the compa d. Common Stockholders have a privilege of buying specified number of additional shares that the company sell be

B1. Write a formula that can be used to value a stock, regardless of dividend pattern. - The value of a stock can be computed through the cash flows it can produce. This pertains to the present value of Po = D1 / (rs - g) or Po = [D1 / (1+ rs)] + [D2 / (1+ rs)+.. + *D1 / (1+ rs)] B2. What is a constant growth stock? How are they valued? - Constant growth stock is a stock whose dividends are expected to grow at constant rate in the forseeable future. Po = D1 / (rs - g)

B3. What are the implications if the company forecasts a conststant "g" higher than "rs"? Will many stocks will have expec - if g > rs, the market price of a stock will be negative which cannot happen.

C. Assume that Bau Bau Agency has a beta coefficient of 1.2, that the risk-free rate (the yield on T-bonds) is 7%, and that th rs = rRF + (rM rRF)b = 7% + (12% - 7%) 1.2 = 13%

D. Assume that Bau Bau Agency is a constant growth company whose last dividend (D0, which was paid yesterday) was $2 1. What is the firms expected dividend stream over the next 3 years? D1 = 2 x 1.06 = 2.12 D2 = 2.12 x 1.06 = 2.2472 D3 = 2.2472 x 1.06 = 2.3820 2. What is its current stock price? Po = D1 / (rs - g) = 2.12 / (.13 - .06) = 30.29 3. What is the stocks expected value 1 year from now? P1 = D2/ (rs-g) = 2.2472 / (.13 - .06) = 32.10 4. What are the expected dividend yield, capital gains yield, and total return during the first year? Dividend Yield = D1 / Po = 2.12 / 30.29 = 7%

Capital Gains Yiel = (P1 - Po) / Po = (32.10 - 30.29) / 30.29 = 7% E. Now assume that the stock is currently selling at $30.29. What is its expected rate of return? rs = (D1 / Po) + g = (2.12 / 30.29) + .06 = .13 or 13% F. What would the stock price be if its dividends were expected to have zero growth? rs = D / rs = 2 / .13 = 15.38

G. Now assume that Bau Nau Agency is expected to experience nonconstant growth of 30% for the next 3 years, then to re Po = [D1 / (1.13)] + [D2 / (1.13)] + [D3 / (1.13)] + P3 = [2 .6/ (1.13)] + [3.380/ (1.13)] + [4.394 / (1.13)] + [4.65764 / (.13 - 0.07)] = 2.301 + 2.647 + 3.045 + 46.114 = 54.107 Dividend Yield = D1 / Po = 2.6 / 54.107 = 4.8% Capital Gains Yield = rs - g = .13 - .048 = 8.2%

H. Suppose Bau Bau Agency is expected to experience zero growth during the first 3 years and then to resume its steady-st Po = [D1 / (1.13)] + [D2 / (1.13)] + [D3 / (1.13)] + P3 =[2 / (1.13)] + [2/ (1.13)] + [2 / (1.13)] + [2.12 / (.13 - 0.07)] = 25.72

I. Why would anyone be willing to buy such a stock, and atwhat price should it sell? What would be its dividend and capital - The company is earning somethingand paying some dividends, so it clearly has a value greater thanzero. That valu Po = D1/ (rs - g ) = 1.88/ (.13 - -.06) = 1.88 / .19 = 9.89 Dividend yield = 13.0% (-6.0%) = 19.0%. J. Suppose Bau Bau Agency embarked on an aggressive expansion that
requires additional capital. Management decided to MV of Company = [-5M / (1.10)] + [10M / (1.10)] + [20M / (1.10)] + [21.20 / (.10 - .06)] - 40M = 416.94 - 40M = 376.94M Price per share = 376.94M / 10M shares = 37.69

K. Suppose Bau Bau Agency decided to issue preferred stock that would pay
an annual dividend of $5 and that the issue pric rp = Dp / Vp = 5 / 50 = .10 or 10% For 20 year maturity: PV of dividends = 5 x 8.5136 PV Factor = 42.57 Po - PV of dividends = Dividend of perpetual 50 - 42.57 = 7.43

ompany Ltd. Stock Valuation

a claim on assets after paying all its obligations in case of liquidation. a vote through himself or proxy. e board of directors of the company, which appoints the management. al shares that the company sell before offering it to the public under pre-emptive right of stockholder.

s pertains to the present value of dividends it carries. We can compute it through the formula,

ant rate in the forseeable future. We can value a constant growth stock using the constant growth model with a formula of

Will many stocks will have expected g> rs in the short run? In the long run?

eld on T-bonds) is 7%, and that the required rate of return on the market is 12%. What is Bon Temps required rate of return?

which was paid yesterday) was $2.00 and whose dividend is expected to grow indefinitely at a 6% rate.

% for the next 3 years, then to return to its long-run constant growth rate of 6%. What is the stocks value under these conditions? W

and then to resume its steady-state growth of 6% in the fourth year. What would its value be then? What would its expected dividen

would be its dividend and capitalgains yields in each year? a value greater thanzero. That value can be found with the constant growth formula,but where g is negative:

capital. Management decided to finance the


expansion by borrowing $40 million and by halting dividend
payments to increase retained - .06)] - 40M

dend of $5 and that the issue price was $50 per


share. What would be the stocks expected return? Would the
expected rate of return be

el with a formula of

required rate of return?

value under these conditions? What are its expected dividend and capital gains yields in Year 1? Year 4?

What would its expected dividend and capital gains yields be in Year 1? In Year 4?

nd
payments to increase retained earnings. Its WACC is now 10%,
and the projected free cash flows for the next 3 years are -$5
million, $

uld the
expected rate of return be the same if the preferred was a
perpetual issue or if it had a 20-year maturity?

the next 3 years are -$5


million, $10 million, and $20 million. After Year 3, free cash flow is
projected to grow at a constant 6%. What is B

o grow at a constant 6%. What is Bon Tempss total


value? If it has 10 million shares of stock and $40 million of debt
and preferred stock c

illion of debt
and preferred stock combined, what is the price per share?

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