Finance!! - FINANCE 1 Assume that the average firm in your...

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FINANCE 1. Assume that the average firm in your company's industry is expected to grow at a constant rate of 5 percent, and its dividend yield is 4 percent. Your company is about as risky as the average firm in the industry, but it has just developed a line of innovative new products which leads you to expect that its earnings and dividends will grow at a rate of 40 percent (D 1 = D 0 (1 + g) = D 0 (1.40)) this year and 25 percent the following year, after which growth should match the 5 percent industry average rate. The last dividend paid (D 0 ) was $2. What is the value per share of your firm's stock? 2. Assume an all equity firm has been growing at a 15 percent annual rate and is expected to continue to do so for 3 more years. At that time, growth is expected to slow to a constant 4 percent rate. The firm maintains a 30 percent payout ratio, and this year's retained earnings net of dividends were $1.4 million. The firm's beta is 1.25, the risk-free rate is 8 percent, and the market risk premium is 4 percent. If the market is in equilibrium, what is the market value of the firm's common equity (1 million shares outstanding)? 3. The Hart Mountain Company has recently discovered a new type of kitty litter which is extremely absorbent. It is expected that the firm will experience (beginning now) an unusually high growth rate (20 percent) during the period (3 years) it has exclusive rights to the property where the raw material used to make this kitty litter is found. However, beginning with the fourth year the firm's competition will have access to the material, and from that time on the firm will achieve a normal growth rate of 8 percent annually. During the rapid growth period, the firm's dividend payout ratio will be relatively low (20 percent) in order to conserve funds for reinvestment. However, the decrease in growth in the fourth year will be accompanied by an increase in dividend payout to 50 percent. Last year's earnings were E 0 = $2.00 per share, and the firm's required return is 10 percent. What should be the current price of the common stock? 4.
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This note was uploaded on 05/15/2010 for the course FIN MBA640 taught by Professor Sally during the Spring '10 term at Texas A&M.

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Finance!! - FINANCE 1 Assume that the average firm in your...

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