# Estimating Intrinsic Value

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3.TTY Corporation has just paid a dividend of \$2.30 per share. This dividend is expected to grow by 15% next year, 10% the year after that, and then dividend growth will level off and grow in perpetuity at 5%. You believe that the company’s cost of equity capital is 16.5%. The company’s bonds are rated as “AA” by Standard & Poor’s.What is your estimate of the intrinsic value of TTY Corporation?If the company’s bond rating were to fall to “C”, would you expect the cost of equity to fall or rise? Why? What would this do to the price of the stock?What is thepercentage changein the value of TTY stock if the final growth rate of dividends, currently at 5%, rises to 6%, or falls to 4%?
4) Xterra, Inc. has the following:Operating Earnings \$1,240,000Shares outstanding 1,000Depreciation \$44,000Changes in Working Capital 25,000Other Operating Costs \$34,000Cost of equity 14%Tax Rate 24%Bonds outstanding \$500,000Coupon rate on bonds 5%Capital expenditures \$100,0001.Calculate Xterra’s Free cash flow to equity (FCFE) per share.2.If FCFE is expected to grow at 4% per year indefinitely, calculate the intrinsic price of thecompany’s shares3.Give three situations in which would want to use the FCFE approach instead of the Dividend Discount Model (DDM) to value a stock.
5) The board of Directors of a company is considering an incentive plan for its new president. They are considering paying a cash bonus equal to the president’s salary times (1+ROE) each year for the next five years. Using the Dupont decomposition of ROE, give two advantages and two disadvantages of this plan.

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