Practice Final 2

1. Mohan Gupta is the portfolio manager of an India - based equity fund. He is analyzing the
value of Tata Chemicals Ltd. (Bombay Stock Exchange: TATACHEM). Tata Chemicals is
India’s leading manufacturer of inorganic chemicals, and also manufactures fertilizers and food
additives. Gupta has concluded that the DDM is appropriate to value Tata Chemicals. The most
recent dividend payment of Tata was $9. They have estimated that an average annual growth rate
in DPS of just above 13 percent. Gupta has decided to use a three - stage DDM with a linearly
declining growth rate in stage 2. He considers Tata Chemicals to be an average growth company,
and estimates stage 1 (the growth stage) to be 6 years and stage 2 (the transition stage) to be 10
years. He estimates the growth rate to be 14 percent in stage 1 and 10 percent in stage 3. Gupta
has estimated the required return on equity for Tata Chemicals to be 16 percent. Estimate the
current value of the stock.

2. Watson Dunn is planning to value BCC Corporation, a provider of a variety of industrial

metals and minerals. Dunn uses a single - stage FCFF approach. The fi nancial information
Dunn has assembled for his valuation is as follows:
The company has 1,852 million shares outstanding.
The market value of its debt is $ 3.192 billion.
The FCFF is currently $ 1.1559 billion.
The equity beta is 0.90; the equity risk premium is 5.5 percent; the risk - free rate is 5.5
percent.
The before - tax cost of debt is 7.0 percent.
The tax rate is 40 percent.
To calculate WACC, he will assume the company is fi nanced 25 percent with debt.
The FCFF growth rate is 4 percent.
Using Dunn ’ s information, calculate the following:
A. WACC.
B. Value of the fi rm.
C. Total market value of equity.
D. Value per share.

3. May Stewart, CFA, a retail analyst, is performing a P/E - based comparison of two
hypothetical jewelry stores as of early 2009. She has the following data for Hallwhite Stores
(HS) and Ruffany (RUF).

HS is priced at $ 44. RUF is priced at $ 22.50.

HS has a simple capital structure, earned $ 2.00 per share (basic and diluted) in 2008,
and is expected to earn $ 2.20 (basic and diluted) in 2009.
RUF has a complex capital structure as a result of its outstanding stock options. Moreover,
it had several unusual items that reduced its basic EPS in 2008 to $ 0.50 (versus
the $ 0.75 that it earned in 2007).
For 2009, Stewart expects RUF to achieve net income of $ 30 million. RUF has 30 million
shares outstanding and options outstanding for an additional 3,333,333 shares.
A. Which P/E (trailing or forward) should Stewart use to compare the two companies ’
valuation?
B. Which of the two stocks is relatively more attractive when valued on the basis of
P/Es (assuming that all other factors are approximately the same for both stocks)?