Turbo Technology Computers Stock Valuation

    To solve the problems presented, we will break down each calculation step-by-step. Turbo Technology Computers Stock Valuation 1. Calculate the Value of the Stock Today (P0) The value of the stock today can be calculated using the Dividend Discount Model (DDM) with varying growth rates. Given: - Last dividend (D0) = $1.15 - Growth rates:- Years 1-2: 15% - Year 3: 13% - Year 4 onwards: 6% - Required rate of return (r) = 12% Calculating Dividends: - D1 = D0 × (1 + g1) = $1.15 × (1 + 0.15) = $1.15 × 1.15 = $1.3225 - D2 = D1 × (1 + g1) = $1.3225 × (1 + 0.15) = $1.3225 × 1.15 = $1.520875 - D3 = D2 × (1 + g2) = $1.520875 × (1 + 0.13) = $1.520875 × 1.13 = $1.72007375 For dividends from Year 4 onwards, we calculate the terminal value using the Gordon Growth Model: - D4 = D3 × (1 + g3) = $1.72007375 × (1 + 0.06) = $1.72007375 × 1.06 = $1.825178825 - Terminal Value at Year 3 (P3): [ P3 = \frac{D4}{r - g} = \frac{1.825178825}{0.12 - 0.06} = \frac{1.825178825}{0.06} \approx 30.41964708 ] Calculating Present Value of Dividends and Terminal Value: [ P0 = \frac{D1}{(1 + r)^1} + \frac{D2}{(1 + r)^2} + \frac{D3}{(1 + r)^3} + \frac{P3}{(1 + r)^3} ] [ P0 = \frac{1.3225}{(1 + 0.12)^1} + \frac{1.520875}{(1 + 0.12)^2} + \frac{1.72007375}{(1 + 0.12)^3} + \frac{30.41964708}{(1 + 0.12)^3} ] [ P0 = \frac{1.3225}{1.12} + \frac{1.520875}{1.2544} + \frac{1.72007375}{1.404928} + \frac{30.41964708}{1.404928} ] [ P0 \approx 1.179464 + 1.212511 + 1.224671 + 21.636438 \approx 25.252084 ] Therefore, P0 ≈ $25.25. 2. Calculate P1 and P2 (Future Stock Values) - ( P_1 = \frac{D_2 + P_2}{(1 + r)}) - ( P_2 = \frac{D_3 + P_3}{(1 + r)}) Calculating P2: [ P_2 = \frac{D_3 + P_3}{(1 + r)} = \frac{1.72007375 + 30.41964708}{(1 + 0.12)} = \frac{32.13972083}{1.12} \approx 28.707 ] Calculating P1: [ P_1 = D_2 + P_2 = \frac{D_2}{(1+r)}\times (1+r) = D_2 ] Therefore, ( P_1 ≈ 28.707). 3. Calculate Dividend Yield and Capital Gains Yield for Years 1, 2, and 3 - Dividend Yield: [ \text{Dividend Yield} = \frac{D_n}{P_{n-1}} ] - Capital Gains Yield: [ \text{Capital Gains Yield} = \frac{P_n - P_{n-1}}{P_{n-1}} ] Year 1: - Dividend Yield: ( \frac{D_1}{P_0} = \frac{1.3225}{25.25} ≈ 0.0524) or 5.24% - Capital Gains Yield: ( \frac{P_1 - P_0}{P_0} ≈ \frac{28.707 - 25.25}{25.25} ≈ 0.097) or 9.70% Year 2: - Dividend Yield: ( \frac{D_2}{P_1} = \frac{1.520875}{28.707} ≈ 0.0529) or 5.29% - Capital Gains Yield: ( \frac{P_2 - P_1}{P_1} ≈ \frac{28.707 - 28.707}{28.707} ≈ 0) or 0% Year 3: - Dividend Yield: ( \frac{D_3}{P_2} = \frac{1.72007375}{28.707} ≈ 0.0599) or 5.99% - Capital Gains Yield: ( \frac{P_3 - P_2}{P_2} ≈ \frac{30.41964708 - 28.707}{28.707} ≈ 0.0597) or 5.97% Kassidy's Kabob House Preferred Stock Calculate Required Rate of Return The required rate of return for preferred stock can be calculated using the formula: [ r = \frac{\text{Dividend}}{\text{Price}} ] Given: - Dividend = $5 - Price = $50 [ r = \frac{5}{50} = 0.10 ] Thus, the required rate of return is 10%. McCaffrey's Inc. Calculate McCaffrey's Value of Operations To calculate the value of operations based on Free Cash Flow (FCF): [ \text{Value of Operations} = \frac{\text{FCF} \times (1 + g)}{\text{WACC} - g} ] Given: - FCF = $100,000 - g = 7% or 0.07 - WACC = 11% or 0.11 [ \text{Value of Operations} = \frac{100,000 \times (1 + 0.07)}{0.11 - 0.07} ] [ = \frac{100,000 \times 1.07}{0.04} = \frac{107,000}{0.04} = 2,675,000 ] Total Value of the Company Total value includes value of operations plus non-operating marketable securities: Total Value: [ = \text{Value of Operations} + \text{Marketable Securities} = 2,675,000 + 325,000 = 3,000,000 ] Estimated Value of Common Equity To find the value of common equity: [ \text{Common Equity Value} = \text{Total Value} - \text{Long-term Debt} = 3,000,000 - 1,000,000 = 2,000,000 ] Estimated Per-Share Stock Price To find the per-share stock price: [ \text{Per-Share Price} = \frac{\text{Common Equity Value}}{\text{Shares Outstanding}} = \frac{2,000,000}{50,000} = 40 ] Summary of Results - Turbo Technology Computers: - Value of Stock Today (P0) ≈ $25.25 - ( P_1 ≈ $28.70, P_2 ≈ $28.70) - Dividend Yield and Capital Gains Yield for Years:- Year 1: Dividend Yield ≈ 5.24%, Capital Gains Yield ≈ 9.70% - Year 2: Dividend Yield ≈ 5.29%, Capital Gains Yield ≈ 0% - Year 3: Dividend Yield ≈ 5.99%, Capital Gains Yield ≈ 5.97% - Kassidy's Kabob House: - Required Rate of Return ≈ 10% - McCaffrey's Inc.: - Value of Operations ≈ $2,675,000 - Total Value ≈ $3,000,000 - Estimated Value of Common Equity ≈ $2,000,000 - Estimated Per-Share Price ≈ $40      

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