Fin 4100

Only available on StudyMode
  • Download(s) : 721
  • Published : May 21, 2013
Open Document
Text Preview
Financial Management

1. Happy Valley, Inc. stock is valued at $51.40 a share. The company pays a constant dividend of $3.80. What is the required return on this stock? 

Po = D/Rs
$51.40 = $3.80/Rs
Rs = 7.39%

2. The Francis Company is expected to pay a dividend of D1 = $1.25 per share at the end of the year, and that dividend is expected to grow at a constant rate of 6.00% per year in the future. The company's beta is 1.15, the market risk premium is 5.50%, and the risk-free rate is 4.00%. What is the company's current stock price?

Po = D1/(Rs-g)Rs = 4% + (5.5%)1.15 = 10.325%
Po = 1.25/(.10325-.06)
Po = 28.90

3. Nachman Industries just paid a dividend of $1.32. Analysts expect the company's dividend to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The required return on this low-risk stock is 9.00%. What is the stock’s current market value?

D1 = 1.716
D2 = 1.8876
D3 = 1.98198

P2 = 1.98198/(.09-.05) = 49.5495

Po = 1.716/(1.09) + (1.8876+49.5495)/(1.09)^2
Po = 44.87

4. A firm has the following sales:

2008200920102011
$1,248,311$1,542,661$1,821,962$2,048,725
Use the compound average growth rate to forecast 2012 sales.

g = [(2048725/1248311)^ .3333] -1
g = 17.956069%
2012 sales = 2048725 (1+.17956069)
2012 sales = 2416595.469

5. A firm is considering two projects, and it requires a 12% return on its projects. Their minimum payback period is 2.5 years. Assuming the projects are independent (not mutually exclusive), which would you choose based on the payback method? The NPV? The IRR?

Project AProject B
Initial outlay $200,000Initial outlay $180,000
Cash flows
Year 1$70,000Year 1$80,000
Year 2$80,000Year 2$90,000
Year 3$90,000Year 3$30,000...
tracking img