Question 1 Chief Medical, Inc. is a little-known producer of heart pacemakers. The earnings and dividend growth prospects of the company are disputed by analysts. Albert Bender at Goldman Sachs is forecasting 5% growth in dividends indefinitely. However, Mary Montgomery at Morgan Stanley is predicting a 20% growth in dividends, but only for the next three years, after which the growth rate is expected
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
Question 1 Chief Medical, Inc. is a little-known producer of heart pacemakers. The earnings and dividend growth prospects of the company are disputed by analysts. Albert Bender at Goldman Sachs is
a. What is the intrinsic value of a share of the stock according to Albert?
b. What is the intrinsic value of a share of the stock according to Mary?
Question 2 MusicTogether.com will pay out its first dividend, $2.00, one year from today. Analysts expect annual dividends to grow at a rate of 15% per year for each of the following two years (year 2 through year 3) after which a normal growth of 6% is expected indefinitely. Investors require a 12% return from holding the stock of MusicTogether.com.
a. What should be the current stock price of MusicTogether.com?
b. If MusicTogether delays paying dividends for a year, i.e. the first dividend will be paid out in two years from today. Accordingly, all later dividends are paid out one year later than originally projected. The pattern of growth rates stays the same, i.e., 15% for two years and 6% thereafter. What is the stock price today?
c. Suppose the company has some preferred stocks that pay $3 per share every quarter forever. The first dividend will be paid one year from today. What is price per share of the
Question 3 Leona Motel’s debt has a face value of $40 million, a coupon rate of 14% (paid semiannually), and expires in 12 years (at t = 12). The current annual yield-to-maturity (stated) for all bonds of the company is 15%. Leona wishes to conserve cash for the next few years. To do this, Leona decides to issue new equity and use the proceeds to purchase the existing debt at the market price. The current stock price of Leona is $60 and there are 2 million shares outstanding.
a. How many shares should Leona issue to purchase the existing debt? Assume the decision to purchase the bond does not change the stock price. Instead, the company decides to issue a zero-coupon bond that matures at year 5, and use the proceeds to purchase the existing debt at the market price.
b. What is the face value of the zero-coupon bond that Leona needs to issue?
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Question 2 MusicTogether.com will pay out its first dividend, $2.00, one year from today. Analysts expect annual dividends to grow at a rate of 15% per year for each of the following two years (year 2 through year 3) after which a normal growth of 6% is expected indefinitely. Investors require a 12% return from holding the stock of MusicTogether.com.
a. What should be the current stock price of MusicTogether.com?
b. If MusicTogether delays paying dividends for a year, i.e. the first dividend will be paid out in two years from today. Accordingly, all later dividends are paid out one year later than originally projected. The pattern of growth rates stays the same, i.e., 15% for two years and 6% thereafter. What is the stock price today?
c. Suppose the company has some preferred stocks that pay $3 per share every quarter forever. The first dividend will be paid one year from today. What is price per share of the
Question 3 Leona Motel’s debt has a face value of $40 million, a coupon rate of 14% (paid semiannually), and expires in 12 years (at t = 12). The current annual yield-to-maturity (stated) for all bonds of the company is 15%. Leona wishes to conserve cash for the next few years. To do this, Leona decides to issue new equity and use the proceeds to purchase the existing debt at the market price. The current stock price of Leona is $60 and there are 2 million shares outstanding.
a. How many shares should Leona issue to purchase the existing debt? Assume the decision to purchase the bond does not change the stock price. Instead, the company decides to issue a zero-coupon bond that matures at year 5, and use the proceeds to purchase the existing debt at the market price.
b. What is the face value of the zero-coupon bond that Leona needs to issue?
by Bartleby ExpertHow did you derive the 36.390144336 on the last step? I've tried multiple variations of the 5.39136/(0.14-0.04)(1.14)^3 that was in the previous step, but not sure how you arrived at that answer
by Bartleby Expert
