1. Assume a major investment service has just given Electrovision Electronics a strong buy rating. Given the recommendation, you decide to investigate for yourself and decide to place a value on the firm’s stock. Here’s what you find: This year, Electrovision paid an annual dividend of $2 per share but because of its high rate of earnings growth, its dividends are expected to growth at the rate of 12% a year for the next 4 years and then to level out at 9% a year. So far, you’ve learned that the stock has a beta of 1.8, the risk-free rate of return is 6%, and the expected return on the market is 11%. Put a value on this stock.

 

2. DMH Enterprises’ 2015 and 2016 balance sheets (in thousands of dollars) are shown below:

(Balance sheet is attached)

 

Sales for 2016 were $455,150,000, and EBITDA was 35% of sales. Furthermore, depreciation and amortization were 11% of net fixed assets, interest was $8,575,000, the corporate tax rate was 40% and DMH pays 40% of its net income as dividends. Calculate free cash flow for 2016.         

 

Free cash flow is expected to grow at a rate of 12% over the next 2 years, at 10% for the following 2 years and then it will level off to 8%. Value the firm’s common stock using the corporate valuation model. The market value of debt is $1.2 billion and the firm has 200 million shares of common stock outstanding. DMH Enterpries weighted average cost of capital is 10%.

Attachments:

• 1501513820-unit 5 assignment balance sheet.PNG