FINANCIAL MANAGEMENT: THEORY AND PRACT
15th Edition
ISBN: 9781305632455
Author: BRIGHAM E. F.
Publisher: CENGAGE L
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Chapter 21, Problem 8SP
a)
Summary Introduction
To determine: The estimated horizon value of unlevered operations at Year 4
b)
Summary Introduction
To determine: The current value of unlevered operations
c)
Summary Introduction
To determine: The estimated horizon value of the tax shield at Year 4
d)
Summary Introduction
To determine: The estimated horizon value of the tax shield at Year 4
e)
Summary Introduction
To determine: The current total value.
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Problem Three (15 marks)
You are an analyst in charge of valuing common stocks. You have been asked to value two stocks. The first stock NEWER Inc. just paid a dividend of $6.00. The dividend is expected to increase by 60%, 45%, 30% and 15% per year, respectively, in the next four years. Thereafter, the dividend will increase by 4% per year in perpetuity.
Calculate NEWER’s expected dividend for t = 1, 2, 3, 4 and 5.
The required rate of return for NEWER stock is 14% compounded annually.
What is NEWER’s stock price?
The second stock is OLDER Inc. OLDER Inc. will pay its first dividend of $10.00 three (3) years from today. The dividend will increase by 30% per year for the following four (4) years after its first dividend payment. Thereafter, the dividend will increase by 3% per year in perpetuity.
Calculate OLDER’s expected dividend for t = 1, 2, 3, 4, 5, 6, 7 and 8.
The required rate of return for OLDER stock is 16% compounded annually.
What is OLDER’s stock price?
Now assume that…
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