BUSINESS
COMM 203 - F18 - C11 - Stock Val.pptx

As a result we have dividend growth model loss of

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As a result, we have Dividend Growth Model Loss of 77.44% ! South Saskatchewan Turbine Co. (SSTC) Capital Structure: All-equity firm Shares Outstanding: 45,000 shares Ordinary Investor’s Budget: $8,400 Required Return: 14.17% Dividend Payment Schedule Q1: $2.50 Q4: $3.71 Q2: $3.27 Q5: $3.25 Q3: $4.34 Q6+: 10% growth Upcoming Events Event 1 – Additional Share Issue Announcement Date: Q3 Amount of Shares: 12,500 in Q3 New Required Return: 15.31% Event 2 – Dividend Policy Change Announcement Date: Q5 Change: Q6+ will be 5% growth New Required Return: 27.47% SSTC struggles for secrecy before announcement! Pre-Event2 Post-Event1 5 5 $67.33 per share P P 1 (1 ) t t t D g D P r g r g 5 5 (1 ) D g P r g Post-Event2 5 3.25 (1 0.05) 0.2747 0.05 P Post-Event2 5 $15.19 per share P
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Share Valuation Model Dividend Discount Model: Infinite Growth Because we have the pre- and post- announcement stock prices, we can study the market capitalization of SSTC. First, we compute the market capitalization immediately before the announcement Then, we compute the market capitalization immediately after the announcement. In this new context, we have a change in the stock price only. As a result, we have A huge toll on SSTC! South Saskatchewan Turbine Co. (SSTC) Capital Structure: All-equity firm Shares Outstanding: 45,000 shares Ordinary Investor’s Budget: $8,400 Required Return: 14.17% Dividend Payment Schedule Q1: $2.50 Q4: $3.71 Q2: $3.27 Q5: $3.25 Q3: $4.34 Q6+: 10% growth Upcoming Events Event 1 – Additional Share Issue Announcement Date: Q3 Amount of Shares: 12,500 in Q3 New Required Return: 15.31% Event 2 – Dividend Policy Change Announcement Date: Q5 Change: Q6+ will be 5% growth New Required Return: 27.47% SSTC struggles for secrecy before announcement! Share Price Shares Oustanding SSTC MCap Pre-Event2 Pre-Event2 Post-Event1 5 Shares Oustanding SSTC MCap P Pre-Event2 67.33 57,500 SSTC MCap Pre-Event2 $3,871,233.52 SSTC MCap Post-Event2 Post-Event2 Post-Event1 5 Shares Oustanding SSTC MCap P Post-Event2 15.19 57,500 SSTC MCap Post-Event2 $873,247.66 SSTC MCap
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Our analysis in the context of high information asymmetry is complete. Share Valuation Model Dividend Discount Model: Infinite Growth With respect to the ordinary investor, we observe the following immediately before the announcement We find out the following immediately after the announcement South Saskatchewan Turbine Co. (SSTC) Capital Structure: All-equity firm Shares Outstanding: 45,000 shares Ordinary Investor’s Budget: $8,400 Required Return: 14.17% Dividend Payment Schedule Q1: $2.50 Q4: $3.71 Q2: $3.27 Q5: $3.25 Q3: $4.34 Q6+: 10% growth Reducing dividends is dev astating fo r all a ctors! Upcoming Events Event 1 – Additional Share Issue Announcement Date: Q3 Amount of Shares: 12,500 in Q3 New Required Return: 15.31% Event 2 – Dividend Policy Change Announcement Date: Q5 Change: Q6+ will be 5% growth New Required Return: 27.47% SSTC struggles for secrecy before announcement!
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  • Spring '14
  • Dividend, SSTC, South Saskatchewan Turbine Co.

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