Employer of person X is considering an expansion into a similar filed which includes acquisition of Company T. He is also considering purchasing Company BM each with 5 million shares of stock. The company has free cash flow of 24 million which is expected to grow at 5%. It also has debt of $200 million, preferred stock of $50 million, and short-term investment of $100million. WACC of 11%. To determine: The formula used to value the dividend paying stock irrespective of its dividend pattern.

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Answer 1

Question

Chapter 7, Problem 14MC

1)

Summary Introduction

Case summary:

Employer of person X is considering an expansion into a similar filed which includes acquisition of Company T. He is also considering purchasing Company BM each with 5 million shares of stock.

The company has free cash flow of 24 million which is expected to grow at 5%. It also has debt of $200 million, preferred stock of $50 million, and short-term investment of $100million. WACC of 11%.

To determine: The formula used to value the dividend paying stock irrespective of its dividend pattern.

2)

Summary Introduction

To determine: The constant growth stock and the way it is valued.

3)

Summary Introduction

To discuss: The effects when a company has a constant growth rate which exist its r_s.constant growth stock and the way it is valued and whether the stocks have expected growth more than the required rate of return in long run or short run.

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Suppose a stock is not currently paying dividends, and its management has announced that it will not pay a dividend for several years, but that it does expect to start paying dividends sometime in the future. Under these conditions, which of the following statements is most correct? Since it is expected to someday pay dividends, the value of the stock today can be found with this equation: PO = D1/(r - g). Under these conditions, we can estimate a value for the stock, but we cannot use any form of the constant growth DCF model to do so. Such a stock should have a value of zero until it actually begins paying dividends. The value of the stock can be found using DCF procedures by finding the present value of expected future dividends accounting for their timing and amount.

How could you use the nonconstant growth modelto find the value of the stock? Here you can assumethat the expected growth rate starts at a high level,then declines for several years, and finally reachesa steady state where growth is constant.

Which of the following statements is CORRECT? a. The constant growth model takes into consideration the capital gains investors expect to earn on a stock. b. Two firms with the same expected dividend and growth rate must also have the same stock price. c. It is appropriate to use the constant growth model to estimate a stock's value even if its growth rate is never expected to become constant. d. If a stock has a required rate of return rs = 12%, and if its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%. e. The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate. provide an explanation for the choice.

Answer 2

Question

Chapter 7, Problem 14MC

1)

Summary Introduction

Case summary:

Employer of person X is considering an expansion into a similar filed which includes acquisition of Company T. He is also considering purchasing Company BM each with 5 million shares of stock.

The company has free cash flow of 24 million which is expected to grow at 5%. It also has debt of $200 million, preferred stock of $50 million, and short-term investment of $100million. WACC of 11%.

To determine: The formula used to value the dividend paying stock irrespective of its dividend pattern.

2)

Summary Introduction

To determine: The constant growth stock and the way it is valued.

3)

Summary Introduction

To discuss: The effects when a company has a constant growth rate which exist its r_s.constant growth stock and the way it is valued and whether the stocks have expected growth more than the required rate of return in long run or short run.

Expert Solution & Answer

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Answer 3

Question

Chapter 7, Problem 14MC

1)

Summary Introduction

Case summary:

Employer of person X is considering an expansion into a similar filed which includes acquisition of Company T. He is also considering purchasing Company BM each with 5 million shares of stock.

The company has free cash flow of 24 million which is expected to grow at 5%. It also has debt of $200 million, preferred stock of $50 million, and short-term investment of $100million. WACC of 11%.

To determine: The formula used to value the dividend paying stock irrespective of its dividend pattern.

2)

Summary Introduction

To determine: The constant growth stock and the way it is valued.

3)

Summary Introduction

To discuss: The effects when a company has a constant growth rate which exist its r_s.constant growth stock and the way it is valued and whether the stocks have expected growth more than the required rate of return in long run or short run.

Expert Solution & Answer

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Answer 4

Question

Chapter 7, Problem 14MC

1)

Summary Introduction

Case summary:

Employer of person X is considering an expansion into a similar filed which includes acquisition of Company T. He is also considering purchasing Company BM each with 5 million shares of stock.

The company has free cash flow of 24 million which is expected to grow at 5%. It also has debt of $200 million, preferred stock of $50 million, and short-term investment of $100million. WACC of 11%.

To determine: The formula used to value the dividend paying stock irrespective of its dividend pattern.

2)

Summary Introduction

To determine: The constant growth stock and the way it is valued.

3)

Summary Introduction

To discuss: The effects when a company has a constant growth rate which exist its r_s.constant growth stock and the way it is valued and whether the stocks have expected growth more than the required rate of return in long run or short run.

Expert Solution & Answer

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Answer 5

Chapter 7, Problem 14MC

1)

Summary Introduction

Case summary:

Employer of person X is considering an expansion into a similar filed which includes acquisition of Company T. He is also considering purchasing Company BM each with 5 million shares of stock.

The company has free cash flow of 24 million which is expected to grow at 5%. It also has debt of $200 million, preferred stock of $50 million, and short-term investment of $100million. WACC of 11%.

To determine: The formula used to value the dividend paying stock irrespective of its dividend pattern.

2)

Summary Introduction

To determine: The constant growth stock and the way it is valued.

3)

Summary Introduction

To discuss: The effects when a company has a constant growth rate which exist its r_s.constant growth stock and the way it is valued and whether the stocks have expected growth more than the required rate of return in long run or short run.

Answer 6

Chapter 7, Problem 14MC

1)

Summary Introduction

Case summary:

Employer of person X is considering an expansion into a similar filed which includes acquisition of Company T. He is also considering purchasing Company BM each with 5 million shares of stock.

The company has free cash flow of 24 million which is expected to grow at 5%. It also has debt of $200 million, preferred stock of $50 million, and short-term investment of $100million. WACC of 11%.

To determine: The formula used to value the dividend paying stock irrespective of its dividend pattern.

Answer 7

Chapter 7, Problem 14MC

1)

Summary Introduction

Case summary:

Employer of person X is considering an expansion into a similar filed which includes acquisition of Company T. He is also considering purchasing Company BM each with 5 million shares of stock.

The company has free cash flow of 24 million which is expected to grow at 5%. It also has debt of $200 million, preferred stock of $50 million, and short-term investment of $100million. WACC of 11%.

To determine: The formula used to value the dividend paying stock irrespective of its dividend pattern.

Answer 8

2)

Summary Introduction

To determine: The constant growth stock and the way it is valued.

Answer 9

2)

Summary Introduction

To determine: The constant growth stock and the way it is valued.

Answer 10

3)

Summary Introduction

To discuss: The effects when a company has a constant growth rate which exist its r_s.constant growth stock and the way it is valued and whether the stocks have expected growth more than the required rate of return in long run or short run.

Answer 11

3)

Summary Introduction

To discuss: The effects when a company has a constant growth rate which exist its r_s.constant growth stock and the way it is valued and whether the stocks have expected growth more than the required rate of return in long run or short run.

Answer 12

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Answer 13

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Answer 14

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Answer 15

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Solution Summary: The author explains the formula used to determine the constant growth stock and the way it is valued.

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To determine: The constant growth stock and the way it is valued.

To discuss: The effects when a company has a constant growth rate which exist its r_s.constant growth stock and the way it is valued and whether the stocks have expected growth more than the required rate of return in long run or short run.

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Chapter 7 Solutions

Solution Summary: The author explains the formula used to determine the constant growth stock and the way it is valued.

Concept explainers

Videos

To determine: The constant growth stock and the way it is valued.

To discuss: The effects when a company has a constant growth rate which exist its rs.constant growth stock and the way it is valued and whether the stocks have expected growth more than the required rate of return in long run or short run.

Want to see the full answer?

Chapter 7 Solutions

To discuss: The effects when a company has a constant growth rate which exist its r_s.constant growth stock and the way it is valued and whether the stocks have expected growth more than the required rate of return in long run or short run.