1. T&C Enterprises has free cash flows today, FCF₀, of $150 million. The firm's WACC is 10%. The firm has debt of $120 million, and 100 million outstanding shares.

a. Assume T&C's free cash flows will grow at constant rate of 5% annually. Using the Corporate Value model, what is the firm's expected price per share today?

 

b. Now assume that T&C's free cash flows will grow 30% the first year, 20% the second year, 10% the third year, followed by a constant rate of 5% thereafter. Under this scenario, what is the firm's expected price per share today,P₀?

 

 

2. You have just completed an analysis of Rodriguez Manufacturing. You used the Capital Asset Pricing Model to determine that the required rate of return is 13%.

The last dividend paid was $1.80, and the current price is $25. Based on new manufacturing processes that the company recently adopted and the company's history of consistently paying dividends, you believe the company's dividends will grow at a constant growth rate of 6%.

a. What is the expected rate of return of Rodriguez Manufacturing's stock?

b. Based on your analysis, which of the following statements is true?

1. The stock is experiencing supernormal growth

2. The stock is in equilibrium

3. The stock is probably a good buy because it is undervalued

4. The stock is not a good buy because it is overvalued

5. The dividend is too low

c. Now consider a different scenario. If Rodriguez' dividend grows 15% for a year, 10% in year 2, and 6% a year thereafter, what is the expected price today, P₀?