Northern California Fruit Company´s latest earnings are $2,00 per share.
Earnings per share are expected
16 compound annual rate for 4 yeats, at a 12 percent annual rate for the next 4 years, and at 6 percent there
ratio is expected to be 25 percent the first 4 yeats, 40 percent the nest 4 years, and 50 percent thereafter
price/earings per share are used in the denominator.
a) If the required rate of return is 14 percent, what is the present market price per share?
b) If the present market price pet share is $30, what is the stock´s expected return?
latest earnings 2
PHASE EPS GRPWTH DIVIDEND-PAYOUT RATIO
1-4 YEARS 20% 25%
4-8 YEARS 12% 40%
YEAR 9 AND 6% 50%
BEYOND
PRESENT VALUE
EARNING PER DIVIDEND DIVIDEND
TIME OF DIVIDEND
SHARE PAYOUT PER SHARE
(14%)
1 $2.40 0.25 $0.60 $0.53
2 $2.88 0.25 $0.72 $0.55
3 $3.46 0.25 $0.86 $0.58
4 $4.15 0.25 $1.04 $0.61
5 $4.64 0.4 $1.86 $0.96
6 $5.20 0.4 $2.08 $0.95
7 $5.83 0.4 $2.33 $0.93
8 $6.53 0.4 $2.61 $0.92
$6.04
Year 9 EPS= 6,53(1,06)= $6.92
P8= 6,92x8,5PE $58.80
TERMINAL VALUE $58.80
B 1) AT 13 %
Year Earnings Dividend DF @13%
0 2.00
1 2.40 0.60 0.884955752212
2 2.88 0.72 0.783146683374
3 3.46 0.86 0.693050162278
4 4.15 1.04 0.613318727679
5 4.64 1.86 0.542759935999
6 5.20 2.08 0.480318527433
7 5.83 2.33 0.425060643746
8 6.53 2.61 0.376159861722
9 6.92 3.46
Year Earning at year -9 P/E Ratio
9 6.92 X 8.50 0.376160
9 6.92 X 8.50 0.376160
Price at 14%
Market Price
2) AT 12 %
Year Earnings Dividend DF @12%
0 2.00
1 2.40 0.60 0.892857142857
2 2.88 0.72 0.797193877551
3 3.46 0.86 0.711780247813
4 4.15 1.04 0.635518078405
5 4.64 1.86 0.567426855719
6 5.20 2.08 0.506631121177
7 5.83 2.33 0.452349215337
8 6.53 2.61 0.403883227979
9 6.92 3.46
Year Earning at year -9 P/E Ratio
9 6.92 X 8.50 0.403883
9 6.92 X 8.50 0.403883
Price at 14%
Market Price
Interpolating we have, IRR = A + (a/b) X (b-a)
A Lower Rate
B Higher Rate 0.12 +
a Positive NPV
b Negative NPV 0.12 +
0.12 +
18
Shirley Batavia is analyzing an investment in a shopping center, The expected return on investment is 20 p
distribution of possible returns is a normal bell-shaped distribution with a standard deviation of 15 percen
a) What are the chances that th investment will resultin a negative return?
The expected return on investment is 20 percent with a standard deviation of 15 percent, then:
20 = 1.33
15
We look for the probability that the return is lower, in a normal table of standard distribution:
Standard Deviation = Mean - Expected Value
Standard Deviation
20 - Zero 20 1.333333333333
15 15
In Table C at the back of the book, there is 0.968 probability for 1.3 standard deviation and
0.0885 for 1.35 standard deviation. Using Interpolation we have,
Interpolating we have, IRR = A + (a/b) X (b-a)
0.0968 -- 1.333- 1.3
1.35 -1.3
0.0968 -- 0.03
0.05
0.0968 -- 0.66
0.0968 -- 0.0055
9.13%
R: The chances that the investment will result in a negative return is 4,03 percent, hat is, that is the risk of this investment and
95.97 percent.
b) What is the probability that the returns will be greater than (1) 10 percent? (2) 20 percent? (3) 30 percent
percent?
Probability 0.10 0.20 0.30 0.40 0.50
Possible return -0.10 0.00 0.10 0.20 0.30
The expected return is
R = (0,10 x -0,10) + (0,20 x 0,00) + (0,30 x 0,10) + (0,30 x 0,20) + (0,10 x 0,30)
R= 25.00%
The standard deviation is
SD = [(-0,10 - 0,11)^2 x 0,10] + [(0,00 - 0,11)^2 x 0,20] + [(0,10 - 0,11)^2 x 0,30] + [(0,20 - 0,11)^2 x 0,30] + [(0,30 - 0,11)^2 x 0,
SD = #REF! + #REF! + #REF!
SD = #REF!
SD = (0,010850)^1/2
SD = #REF!
Standardizing the deviation from the expected value
R 25.00%
= = #REF!
SD #REF!
re. Earnings per share are expected to grow at a 20 percent
next 4 years, and at 6 percent thereafter. The dividend-payout
t 4 years, and 50 percent thereafter. At the end of year 8, the
t price per share?
PV
0.53
0.56
0.60
0.64
1.01
1.00
0.99
0.98
6.31
22.12
28.43
30.00
- 1.57
PV
0.54
0.57
0.61
0.66
1.05
1.05
1.05
1.05
6.60
23.75
30.35
30.00
0.35
0.35 X 0.01
1.92
0.18 X 0.01
0.00
12.18%
xpected return on investment is 20 percent. The probability
th a standard deviation of 15 percent.
Now refer Table C
X 0.0968 -0.0885
X 0.0968 -0.0885
X 0.0083
hat is the risk of this investment and the probability of return is
cent? (2) 20 percent? (3) 30 percent (4) 40 percent? (5) 50
,11)^2 x 0,30] + [(0,30 - 0,11)^2 x 0,10]
+ #REF! + #REF!
QUESTION 16
The present market price per share es around 0,75, this price change between 0,53
and 0,96 between the years 1 and 8, these changes are due to variations in dividend
payments in each year being years 5 to 8, the best ones for the price of the dividend
and for the shareholders when obtaining a better price by dividend
QUESTION 18
The chances that the investment will result in a negative return is 4,03 percent, hat is,
that is the risk of this investment and the probability of return is 95.97 percent, which
leads us to conclude that this investment is of acceptable risk.
Additional In this exercise, the standard deviation relative to the expected value
indicates little dispersion and a high degree of confidence in the result.