You want to buy Burrito Inc. stock. They pay annual dividends, with the next dividend of $0.45 per share being paid later today. You believe that, during the next 10 years, their annual dividends will grow by 45% APR, compounded annually. But after 10 years, their annual dividends will grow more slowly... only at 4% APR, compounded annually. 1. Burrito Inc. has a beta of 1.78. The risk-free rate of return is 3%, and the average risk premium is 6%. What should be the price ofa share of Burrito stock? (You can assume that the return given by the CAPM is compounded annually). Burrito Inc. (same company from above) is looking to expand its operations to another location. This would be a scale-expansion of the business. It would cost $50 million today to expand to the new location, but next year would generate an incremental FCF of $4 million. These annual CFs would grow by 4% per year into perpetuity. 2. Burrito Inc.'s capital structure is 25% debt, and their tax rate is 30%. Given this information, should the company expand to the new location?|
You want to buy Burrito Inc. stock. They pay annual dividends, with the next dividend of $0.45 per share being paid later today. You believe that, during the next 10 years, their annual dividends will grow by 45% APR, compounded annually. But after 10 years, their annual dividends will grow more slowly... only at 4% APR, compounded annually. 1. Burrito Inc. has a beta of 1.78. The risk-free rate of return is 3%, and the average risk premium is 6%. What should be the price ofa share of Burrito stock? (You can assume that the return given by the CAPM is compounded annually). Burrito Inc. (same company from above) is looking to expand its operations to another location. This would be a scale-expansion of the business. It would cost $50 million today to expand to the new location, but next year would generate an incremental FCF of $4 million. These annual CFs would grow by 4% per year into perpetuity. 2. Burrito Inc.'s capital structure is 25% debt, and their tax rate is 30%. Given this information, should the company expand to the new location?|
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
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I need help answering #2 question and how to set up with formulas in excel, it builds on #1 details.
I've already gotten answer for #1 as price per share for Burrito stock as $76.77.
(Expected Return = 3%+1.78*(6%), Constant rate is 4%,
I will post question #1 for additional details needed, but I need help with #2.
Transcribed Image Text:You want to buy Burrito Inc. stock. They pay annual dividends, with the next dividend of
$0.45 per share being paid later today. You believe that, during the next 10 years, their annual
dividends will grow by 45% APR, compounded annually. But after 10 years, their annual
dividends will grow more slowly... only at 4% APR, compounded annually.
1.
Burrito Inc. has a beta of 1.78. The risk-free rate of return is 3%, and the average risk
premium is 6%. What should be the price ofa share of Burrito stock? (You can assume that
the return given by the CAPM is compounded annually).
Burrito Inc. (same company from above) is looking to expand its operations to another
location. This would be a scale-expansion of the business. It would cost $50 million today
to expand to the new location, but next year would generate an incremental FCF of $4
million. These annual CFs would grow by 4% per year into perpetuity.
2.
Burrito Inc.'s capital structure is 25% debt, and their tax rate is 30%. Given this information,
should the company expand to the new location?|
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