Chegg Resident Tutor Experts, Kindly solve the entire Problem Presented. Thank y
ID: 2456423 • Letter: C
Question
Chegg Resident Tutor Experts, Kindly solve the entire Problem Presented. Thank you.
Contrary to the conservative securities analysts, Mr. Stephens feels that the company could maintain a constant annual growth rate in dividends per share of 11.5% in the future, or possibly 15% for the next 2 years and 11.5% thereafter. Mr. Stephens based his estimates on an established long-term expansion plan throughout the United States, Canadian and Mexican markets. Venturing into these markets was expected to cause the risk of the firm, as measured by the beta on its stock, to increase immediately from 1.1 to 1.5.
c. (1) What is the current required return for Soda Pop stock (use CAPM)? (please show formulas and work)
(2) What will be the new required return for Soda Pop stock assuming that they expand into Other States, Canadian, and Mexican markets as planned (use CAPM)? (please show formulas and work)
D. If the securities analysts are correct and there is no growth in future dividends, what will be the value per share of the Soda Pop stock? (Note: use the new required return on the company’s stock here)
Data item
2015 value
Earnings per share (EPS)
$8.26
Price per share of common stock
$104.25
Book value of common stock equity
$325,000,000
Total common shares outstanding
8,300,000
Common stock dividend per share
$4.05
Data Points
Beta, b
Required Return, K
0
2.25%
.25
4.600%
.5
6.950%
.75
9.300%
1
11.650%
1.25
14.000%
1.5
16.350%
1.75
18.700%
2.0
21.050%
Data item
2015 value
Earnings per share (EPS)
$8.26
Price per share of common stock
$104.25
Book value of common stock equity
$325,000,000
Total common shares outstanding
8,300,000
Common stock dividend per share
$4.05
Data Points
Beta, b
Required Return, K
0
2.25%
.25
4.600%
.5
6.950%
.75
9.300%
1
11.650%
1.25
14.000%
1.5
16.350%
1.75
18.700%
2.0
21.050%
Explanation / Answer
a.
Required Return = Risk free rate + Beta x (Market return - Risk free rate)
Required return = 2.25% + 1.1 x (11.650% - 2.25%) = 12.59%
Risk free rate is when beta = 0
b.
Required Return = Risk free rate + Beta x (Market return - Risk free rate)
Required return = 2.25% + 1.5 x (16.350% - 2.25%) = 23.40%
c. value per share = Dividend/ required return
Value per share = $4.05/23.40% = $17.31
Assuming Beta = 1.5
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