johnson & Wales University Week 5 Great Plains Energy Value of Stock Questions Please see attached document. Also please show all work. All questions liste

johnson & Wales University Week 5 Great Plains Energy Value of Stock Questions Please see attached document. Also please show all work. All questions listed on attached document. 1.Great Plains Energy is a public utility holding company that listed its 4.5 percent cumulative perpetual preferred stock series E on the NYSE Euronext in March 1952 ( Ticker: GXPPrE). The par value of the preferred stock is $ 100. If the required rate of return on this stock is 5.6 percent, estimate the value of the stock. 1.Great Plains Energy is a public utility holding company that listed its 4.5 percent cumulative
perpetual preferred stock series E on the NYSE Euronext in March 1952 ( Ticker: GXPPrE). The
par value of the preferred stock is $ 100. If the required rate of return on this stock is 5.6 percent,
estimate the value of the stock
2. Indicate the effect on this period’s FCFF and FCFE of a change in each of the items listed
here. Assume a $ 100 increase in each case and a 40 percent tax rate.
A. Net income.
B. Cash operating expenses.
C. Depreciation.
D. Interest expense.
E. EBIT.
F. Accounts receivable.
G. Accounts payable.
H. Property, plant, and equipment.
I. Notes payable.
J. Cash dividends paid.
K. Proceeds from issuing new common shares.
3. In a research note on the ordinary shares of the Milan Fashion Group ( MFG) dated early July
2007 when a recent price was € 7.73 and projected annual dividends were € 0.05, an analyst
stated a target price of € 9.20. The research note did not discuss how the target price was
obtained or how it should be interpreted. Assume the target price represents the expected price of
MFG. What further specific pieces of information would you need to form an opinion on
whether MFG was fairly valued, overvalued, or undervalued?
4. Proust Company has FCFF of $ 1.7 billion and FCFE of $ 1.3 billion. Proust ’s WACC is 11
percent, and its required rate of return for equity is 13 percent. FCFF is expected to grow forever
at 7 percent, and FCFE is expected to grow forever at 7.5 percent. Proust has debt outstanding of
$ 15 billion.
A. What is the total value of Proust’ s equity using the FCFF valuation approach?
B. What is the total value of Proust’ s equity using the FCFE valuation approach?
5. The estimated betas for AOL Time Warner ( NYSE: AOL), J. P. Morgan Chase & Company (
NYSE: JPM), and The Boeing Company ( NYSE: BA) are 2.50, 1.50, and 0.80, respectively.
The risk – free rate of return is 4.35 percent and the equity risk premium is 8.04 percent.
Calculate the required rates of return for these three stocks using the CAPM.
6. Quinton Johnston is evaluating TMI Manufacturing Company, Ltd., which is head-quartered
in Taiwan. In 2008, when Johnston is performing his analysis, the company is unprofitable.
Furthermore, TMI pays no dividends on its common shares. Johnston decides to value TMI
Manufacturing by using his forecasts of FCFE. Johnston gathers the following facts and
assumptions:
The company has 17.0 billion shares outstanding.
Sales will be $ 5.5 billion in 2009, increasing at 28 percent annually for the next four years
(through 2013).
Net income will be 32 percent of sales.
Investment in fixed assets will be 35 percent of sales; investment in working capital will be 6
percent of sales; depreciation will be 9 percent of sales.
20 percent of the investment in assets will be financed with debt.
Interest expenses will be only 2 percent of sales.
The tax rate will be 10 percent. TMI Manufacturing ’s beta is 2.1; the risk-free government bond
rate is 6.4 percent; the equity risk premium is 5.0 percent.
At the end of 2013, Johnston projects TMI will sell for 18 times earnings.
What is the value of one ordinary share of TMI Manufacturing Company?
7. German Resources is involved in coal mining. The company is currently profitable and is
expected to pay a dividend of € 4 per share next year. The company has suspended exploration,
however, and because its current mature operations exhaust the existing mines, you expect that
the dividends paid by the company will decline forever at an 8 percent rate. The required return
on German Resource’s stock is 11 percent. Using the DDM, estimate the value of the stock.
8. Critique the statement: “ No equity investor needs to understand valuation models because real
– time market prices for equities are easy to obtain online.
9. Maspeth Robotics shares are currently selling for € 24 and have paid a dividend of € 1 per
share for the most recent year. The following additional information is given:
The risk – free rate is 4 percent.
The shares have an estimated beta of 1.2.
The equity risk premium is estimated at 5 percent.
Based on the above information, determine the constant dividend growth rate that would be
required to justify the market price of € 24.
10. The term free cash flow is frequently applied to cash flows that differ from the definition for
FCFF that should be used to value a firm. Two such definitions of free cash flow are given
below. Compare these two definitions for free cash flow with the technically correct definition of
FCFF used in the text.
A. FCF = Net income + Depreciation and amortization – Cash dividends – Capital
expenditures.B. FCF = Cash flow from operations ( from the statement of cash flows) – Capital
expenditures.

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