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bachelor in business administration
Polytechnic State University Sanluis
Jan-2006 - Nov-2010
CPA
Polytechnic State University
Jan-2012 - Nov-2016
Professor
Harvard Square Academy (HS2)
Mar-2012 - Present
Homework Chapter 14 week 7
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PROBLEM 6:  Lauren Entertainment, Inc., has an 18 percent annual growth rate compared to the market rate of 8 percent.  If the market multiple is 18, determine P/E ratios for Lauren Entertainment, Inc., assuming its beta is 1.0 and you feel t can maintain its superior growth rate for:Â
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a.        The next 10 years
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b.      The next 5 years
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PROBLEM 7:Â Â You are given the following information about two computer software firms and the S&P Industrials
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                        ----------------------------Company A-------------------Company B--------------S & P Industrials
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P/E Ratio                                                  30.00                                  27.00                                     18.00
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Expected annual growth rate                0.18                                     0.15                                       0.07
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Dividend yield                                         0.00                                      0.01                                       0.02
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a.       Compute the growth duration of each company stock relative to the S & P Industrials.
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b.                                                                                                                                                              Â
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c.       Given these growth durations, what determines your investment decision? Â
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Problem 8:  The value of an asset is the present value of the expected returns from the asset during the holding period.  An investment will provide a stream of returns during this period, and it is necessary to discount this stream of returns at an appropriate rate to determine the set’s present value.  A dividend valuation model such as the following is frequently used.     Pi= D1
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                                                                                                          -----------------
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                                                                                                                 (k i- gi)
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Where
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Pi = the current price of Common Stock i
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D1 = the expected dividend in period 1
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Ki = the required rate of return on Stock i
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Gi = the expected constant-growth rate of dividends for Stock i
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a.        Identify the three factors that must be estimated for any valuation model, and explain why these estimates are more difficult to derive for common stocks than for bonds.Â
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b.      Explain the principal problem involved in using a dividend valuation model to value,
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(1)Â Â Â Â Â Companies whose operations are closely correlated with economic cycles.
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(2)Â Â Â Â Â Â Companies that are of very large and mature.
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(3)Â Â Â Â Â Â Companies that are quite small and are growing rapidly.
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Assume that all companies pay dividend.
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PROBLEM 10:Â Â The constant growth dividend discount model can be used both for the valuation of companies and for the estimation of the long-term term total return of a stock.
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                                    Assume               $ 20=Price of a Stock Today
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                                                                 8%= Expected Growth Rate of Dividend
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                                                              0.60=Annual Dividend One Year Forward
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a. Using only the preceding data, compute the expected long-term total return on the stock using the constant-growth dividend discount model.
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c. Identify three alternative methods to the dividend discount model for the valuation of companies.
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PROBLEM 11:Â Â An analyst expects a risk-free return of 4.5 percent, a market of 14.5 percent, and the return for Stocks A and B that are show in Exhibit 14.24.
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EXHIBIT 14.24 STOCK INFORMATION
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                                STOCK                             BETA                                 Analyst’s Estimated Return
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                                    A                                    1.2                                                         16%
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                                    B                                     0.8                                                         14%
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a.       Show on a graph:
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(1)Â Â Â Â Where Stocks A and B would plot on the security market line (SML) if they were fairly value using the capital asset pricing model (CAMP).
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(2)Â Â Â Â Where Stocks A and B actually plot on the same graph according to the return estimated by the analyst and shown in Exhibit 14.24.
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b.      State whether Stock A and B are undervalued if the analyst uses the SML for strategic investment decisions
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PROBLEM 12:  Lauren Turk is reviewing Francesca Toy’s financial statements in order to estimate its sustainable growth rate.  Using the information presented in Exhibit 14.25.
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a.       (1)  Identify and calculate the three components of the DuPont formula.
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(2)Â Â Calculate the ROE for 2011, using the three components of the DuPont formula.
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(3)Â Â Calculate the sustainable-growth rate for 2011Thank you very much for responding to the topics in such great details. Â This is the same type of analysis that I expect from a case study. Â Here, you have examined the information presented in the videos and have crafted responses based on the videos. Â And, you only included an outside source to support one of your points. Â If you complete the assignments in a similar manner, you will do well. Â I'm pointing this out so that others can use your responses as examples of how to respond to case study questions. Â I want to touch on the drawbacks of horizontal integration that you mentioned. Â One of the factors that determine the success of horizontal integration is the level of strategic planning capabilities that the senior managers possess. Â In fact, superior strategic planning capabilities has to be one of the core competencies of the leading organization. Â If you look at the merger (now 3 years later), there are several things that SWA has done correctly. Â First, they acquired Airtran as a wholly owned subsidiary of SWA. Â As such, SWA owns 100% of the shares of Airtran. Â However, Airtran continued to operate as an independent entity. Â So, this minimizes the risks involved with synergies and the pitfalls with integration, such as the clash of cultures. Â Airtran continued to target the budget conscious business travelers while SWA continued to target cost conscious consumers. Â Though I haven't done any research on this, I imagine that the salary structures in place for both airlines would continue. Â And, as the analyst reported in the video, SWA's employees are paid very well, even though SWA is a low cost carrier. Â The two companies are scheduled to merge fully as one company by the end of 2014. Â After that time, we'll see what the impact will be. Â Will the business customers that flew with Airtran now want to fly with SWA? Â What do you think? Â Clara, for the last section, on corporate level strategy, you have to state a corporate level strategy that is covered in Chapter 9. Â I'll let you tell me, but what type of strategy did you actually propose in the last sentence especially?
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b. Turk has calculated actual and sustainable growth for each of the past four years and finds in each year that its calculated sustainable-growth rate substantially exceeds its actual growth rate.  Cite two course of action (other than ignoring the problem) that Turk should encourage Francesca Toy to take, assuming the calculated sustainable-growth rate continue to exceed the actual rate.
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Exhibit 14.25 Francesca Toy, Inc:Â Â Actual 2010 and Estimated 2011 Financial Statements for Fiscal Year Ending December 31 ($ Millions, except Per-Share Data)
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                                                                           2010                             2011e                       Change (%)
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Income statement
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Revenue                                                          $ 4,750                         $ 5,140                             7.5
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Coast of goods sold                                       $ 2,400                         $ 2,540
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Selling general, and administrative               1,400                            1,550
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Depreciation                                                          180                               210
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Goodwill amortization                                           10                                  10
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                                                                               -------------------------------------------------------------------
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Operating income                                        $   760                                     $ 830                                     8.4
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Interest expense                                                 20                                          25
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Income before taxes                                   $   740                                    $   805
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Income taxes                                                     265                                           295
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Net income                                                  $   475                                    $     510
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Earnings per share                                     S   1.79                                    $    1.96                                  8.6
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Average shares outstanding (mil)Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 265Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 260
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BALANCE SHEET
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Cash                                                              $   400                                    $      400
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Accounts receivable                                  $   680                                    $      700
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Inventories                                                 $   570                                     $      600
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Net property, and equipment                $    800                                     $      870
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Intangibles                                                 $    500                                     $       530
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Total assets                                               $   2,950                                   $    3,100
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Current liabilities                                     $      550                                   $         600
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Long-term debt                                        $      300                                   $         300
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Total liabilities                                          $     850                                    $         900
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Stockholders’ equity                               $   2,100                                    $    2,200
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Total liabilities and equity                     $   2,950                                    $   3,100
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Book value per share                              $     7.92                                   $      8.46
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Annual dividend per share                    $     0.55                                   $      0.60
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