Wrapping up equity, and just thought these might come up on the beast. 1) If required rate of return on equity = 11%, and long term growth rate of dividends = 6%, what’s the dividend yield? 2) If leading P/E of industry = 12, and company’s expected EPS at end of year 6 is $2.00, what’s the leading terminal value of the stock at end of year 5? 3) What’s the entrprise value (EV) for a stock in the presence of debt, minority interest, and preferred stock?
- (11% - 6%)/1.11 = 4.5% 2) (12 x 2)/(1+r)
- Tge forward looking dividend yield is 5% 2) $24.00 3) EV is debt + equity + preferred - cash. So I’d say the answer is debt, minority interest and preferred.
- 4.7% 2. $24.00 3. EV = debt+equity+preferred-cash+minority interests
- 5% 2. 24 3. MV DEbt+ MV equity+ preferred stock - minority interest-cash
- GGM transformation makes: d/p = (r - g)/(1+g). Answer becomes 4.5% 2. $1,174.39 3. MVd + MVe + MVp - Minority interest - cash
- 4.5% 2. $24 unless there is another piece to the puzzle 3. What everyone else has said.
Dreary Wrote: 1. Dividend yield = D/P. P = D (1.06)/.05, so P/D = 1.06/.05 so D/P = .05/1.06 2. T5 = E6 * P/E = 12*2= 24 3. EV = Equity + Debt + minority + preferred - cash - associates inv. What are the answers? I am so f*kd!!
nielsendc is correct on the dividend yield. it should be 4.5% once you transform the GGM. Stock value has to be $24 (We don’t have anything else to go off of!)
Actually, pepp & prophets are right on the div yield (4.7%). @pepp, thanks for pointing out the logic as well, I’ve been trying to memorize that formula, but it’s so counter intuitive! No idea what the answer is to 2, and believe everyone got the EV right.
Here is how CFA define EV on page 536 in Equity volume 4: …enterprise value is total company value minus the value of cash and short-term investments. Total company value is the market value of debt, common equity, and preferred equity. Cheers
I’m pretty sure MI should be added to EV as well if the company has MI.
Yes, absolutely you have to add minority interest. Because if you were to buy the firm, you’d have to buy the minority interests in it too, just the way you’d have to buy all of the debt.
here is my take on this- minority interest represents the part of the equity that belong to minority shareholders of the firm that you have a controlling interest in!!! Unless you plan to buy 100% of the subsidaries as well you dont have to buy the minority interest.
Minority Interest is always included in Enterprise Value. If you don’t include it, then any debt/cash/short term investments you consolidated from the subsidiary for the % not owned would need to be adjusted as well. Minority Interest effectively becomes part of Equity. So just remember it that way … don’t waste time doubting it!
Sorry for being away… Like others have said: 1. Dividend yield = 4.72% using Gordon. 2. T5 = E6 * P/E = 12*2= 24 (here they might show you EPS4 and EPS5, but the correct way is to use EPS6 in this case). 3. EV = Equity + Debt + minority + preferred - cash In EV, some confused Equity with market cap…here it means market cap.