12. La Luna Papula has a beta of 1.20, the risk free rate of 5.5% and the required market return of 10.5%: a) Assuming that La Luna is a constant growth company whose expected dividend next year is P2.25 and expected to grow indefinitely at 6.5%, what is the company's current stock price? b) Assume that La Luna is expected to experience variable growth of 13% for the next 3 years, 10.5% for the next 2 years, then return to its long-run constant growth of 6.5%. The company recently paid P2.10 per share dividend, what is the stock's value under this condition.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
icon
Related questions
icon
Concept explainers
Topic Video
Question

Answer with full solution pls

12. La Luna Papula has a beta of 1.20, the risk free rate of 5.5% and the required
market return of 10.5%:
a) Assuming that La Luna is a constant growth company whose expected
dividend next year is P2.25 and expected to grow indefinitely at 6.5%,
what is the company's current stock price?
b) Assume that La Luna is expected to experience variable growth of 13% for the
next 3 years, 10.5% for the next 2 years, then return to its long-run constant
growth of 6.5%. The company recently paid P2.10 per share dividend, what is
the stock's value under this condition.
13. La Corona embarks on an aggressive expansion that requires additional capital.
Management decides to finance the expansion by borrowing P50 million and issuing P15
million worth of Preferred stock. The projected free cash flow for the next three years are:
P10million, P20million and P25million annually. After the third year, free cash flow is
expected to grow at a constant rate of 6.5%. The overall cost of capital is 13%. The
company has 12million shares of common stock.
a) What is the total value of La Corona?
b) What is the price per share of common stock?
Transcribed Image Text:12. La Luna Papula has a beta of 1.20, the risk free rate of 5.5% and the required market return of 10.5%: a) Assuming that La Luna is a constant growth company whose expected dividend next year is P2.25 and expected to grow indefinitely at 6.5%, what is the company's current stock price? b) Assume that La Luna is expected to experience variable growth of 13% for the next 3 years, 10.5% for the next 2 years, then return to its long-run constant growth of 6.5%. The company recently paid P2.10 per share dividend, what is the stock's value under this condition. 13. La Corona embarks on an aggressive expansion that requires additional capital. Management decides to finance the expansion by borrowing P50 million and issuing P15 million worth of Preferred stock. The projected free cash flow for the next three years are: P10million, P20million and P25million annually. After the third year, free cash flow is expected to grow at a constant rate of 6.5%. The overall cost of capital is 13%. The company has 12million shares of common stock. a) What is the total value of La Corona? b) What is the price per share of common stock?
Expert Solution
steps

Step by step

Solved in 2 steps

Blurred answer
Knowledge Booster
Stock Valuation
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education