Valuation Assignment Questions Spring 2015
Chapter 9 Assignment Questions
1. Pellagia Inc. is a nationwide retail chain specializing in women's apparel. The company's most popular lines are Aura and Home. Aura offers executive wear for women in the middle to high-end markets, and Home features casual but stylish clothes, also targeted at women in the middle to high-end markets. The company has 115 million shares outstanding with a current market price of $5.63 per share. The company is expected to show net income of $33 million in the next 12 months. Forecast sales and EBITDA are $615 million and $57 million, respectively. Debt outstanding is $140 million. (Show all your work for credit).
a. Do you think that the list below represents valid comparable companies?
b. What is the current enterprise market value of Pellagia?
c. Suppose you are asked to value Pellagia Inc. given the following information. What is your estimate of equity? Of enterprise value?
2. Tel-Talk Inc. is a company that provides domestic and international long distance, regional and local communications services, cable (broadband) television, and Internet communications services. For the past two years, it has paid an annual dividend of $2.31 per share; however, the compound rate of growth in dividends per share over the past 10 years has been 6.2 percent. The beta of Tel-Talk stock measured over the past three years is 1.10. Its debt, which makes up 32 percent of total capital, currently yields 7.28 percent, while long term Treasury bonds are yielding 5.63 percent. The market risk premium (geometric) is at 5.9 percent. Tel-Talk shares are currently trading at $46.25 per share.
Calculate Tel-Talk's cost of equity using: a) the Capital Asset Pricing Model (CAPM), and b) the dividend growth model (look up the constant-growth dividend model if you don’t recall it. Make sure you pick up the right dividend (D1 or the forecast dividend, not D0 the last dividend). Which method would you prefer and why?
3. The following is a
1. Pellagia Inc. is a nationwide retail chain specializing in women's apparel. The company's most popular lines are Aura and Home. Aura offers executive wear for women in the middle to high-end markets, and Home features casual but stylish clothes, also targeted at women in the middle to high-end markets. The company has 115 million shares outstanding with a current market price of $5.63 per share. The company is expected to show net income of $33 million in the next 12 months. Forecast sales and EBITDA are $615 million and $57 million, respectively. Debt outstanding is $140 million. (Show all your work for credit).
a. Do you think that the list below represents valid comparable companies?
b. What is the current enterprise market value of Pellagia?
c. Suppose you are asked to value Pellagia Inc. given the following information. What is your estimate of equity? Of enterprise value?
2. Tel-Talk Inc. is a company that provides domestic and international long distance, regional and local communications services, cable (broadband) television, and Internet communications services. For the past two years, it has paid an annual dividend of $2.31 per share; however, the compound rate of growth in dividends per share over the past 10 years has been 6.2 percent. The beta of Tel-Talk stock measured over the past three years is 1.10. Its debt, which makes up 32 percent of total capital, currently yields 7.28 percent, while long term Treasury bonds are yielding 5.63 percent. The market risk premium (geometric) is at 5.9 percent. Tel-Talk shares are currently trading at $46.25 per share.
Calculate Tel-Talk's cost of equity using: a) the Capital Asset Pricing Model (CAPM), and b) the dividend growth model (look up the constant-growth dividend model if you don’t recall it. Make sure you pick up the right dividend (D1 or the forecast dividend, not D0 the last dividend). Which method would you prefer and why?
3. The following is a