Chapter 18 | Problems 15 & 16

Below are screen shots of how we calculated the results for question 15 and 16 in Chapter 18 of Investments.


For question 15 we are asked to:

Recalculate the instrinsic value of Honda in each of the following scenarios by using the three-stage growth model of spreadsheet 18.1. Treat each scenario independently.

a) ROE in the constant-growth period with be 10%
b) Honda's actual beta is 1.0
c) The market risk premium is 8.5%

For 15A we saw that the present value using a Return on Equity of 10% was $25.17.

15B

15C

For question 16 we were asked to:

Recalculate the intrinsic value of Honda shares using the free cash flow model of spreadsheet 18.2 under each of the following assumptions. Treat each scenario independently.

a) Hond'a P/E ratio starting in 2013 will be 16.
b) Honda's unlevered beta is 0.8.
c) the market risk premium is 9%

16A

16B

16C