Paging Hedge (or other Finance people)
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- fate_
I have a feeling this is going to be a lonely thread, but let's try...
I have a question about valuing the returns on risky projects relative to stock price.
Here is the question:
--------------------------------...
You are an analyst who is evaluating a firm with a current market price of $23.42 per share. This firm has just yesterday made its third annual internal investment of $0.90 per share into a risky new venture that may or may not produce some future cash flow. The firm also has a less-risky core business that currently generates enough cash flow to supply investors with an estimated annual dividend of $2.52 per share next year. You believe the required return and the long-term dividend growth rate for the core-portion of the business are 16.0% and 3.7%, respectively. Based on all of this information, what can you say about this risky new venture in terms of creating value for the company?
--------------------------------...If you do the (very simple) calculations, you discover that the core price of the stock is...
$23.42/ ( r - g) = $23.42 / ( .16-.037) = $20.4878
That means the difference between the core value ($20.4878) and the actual value ($23.42) must represent the risky venture, or...
$2.9322
Then if you calculate the return of this venture using a DCF approach, you get...
[FV] $2.9322
[n] 3 yr
[PMT] -$0.90
___________
[i] 8.366492037 %Which is your appreciation in stock prices due to this new project over the years, right? The market believes that the risky new venture has created value for the company.
That's what I thought, but it's apparently the wrong answer.
Or is the return actually NEUTRAL because the 16% required return on the stock, minus the 8.366499...% return from the project, is (for all purposes) equal to the 3.7% dividend growth rate, and therefore the investment provided no real return, but did no damage either?
- Jnr_Madison0
hedge is dead baby, hedge is dead...
- fate_0
What happened? Did he make the plunge out a skyscraper window?
- QBN pushed him...Jnr_Madison
- i heard someone threw a penny out the window... and he went after itlambsy
- HAHAHAukit
- ukit0
WTF is this, a math test?
- ninjasavant0
whatever you do, make sure your spreadsheets have a faint blue zebra striping with a light grey stroke between cells. You can then use rich colors to designate headers and key fields.
Think I'll go over to marketwatch.com and ask how much gutter I should use in a perfect bound booklet.
- ifeltdave0
the answer is 7.
- boobs0
Here's your first mistake:
$23.42 / ( .16-.037) = $20.4878 is totally wrong.
$23.42/(.16-.037) = $190.41
So sharpen your fucking pencil, and start over. When you've made progress, report back for further instructions. Now get back to your fucking cubicle you carbuncle!
- airey0
42. you can never go past 42.
- MarketMaker0
You don't know what you're talking about, do you?
- dirtydesign0
Hedge said he worked at Lehman Brothers I think. He prob sold his computer.
- MarketMaker0
Never said I worked for Lehman. I ran my own fund.
- fate_0
boobs, sorry, just copy-pasted the wrong number in the formula, it's actually the right output, just the wrong input for the example.
it's still the correct output: $$2.52/ ( r - g) = $2.52 / ( .16-.037) = $20.4878
Anyhow, Hedge, why didn't you help me out bud?
- fate_0
Seriously, intrinsic value of stocks is pretty basic Finance stuff.
- fate_0
p.s. this was a question my Finance homework, I'll know the answer tomorrow. Already submitted it.
But this should have been pretty simple stuff for a guy who does this for a living, right?