Harry’s All American Lawn Care, Inc. has been public for 15 years, but just star
ID: 2651341 • Letter: H
Question
Harry’s All American Lawn Care, Inc. has been public for 15 years, but just started paying dividends 5 years ago on their 50,000 shares of commons stock. Since that time, they have paid the following dividends: (1) $1.00, (2) $1.10, (3) $1.21, (4), $1.33, and (5) $1.46. They plan to continue this pattern for the foreseeable future. In addition, Harry’s has 300 Coupon Bonds outstanding, with face value of $1,000 and CR of 8%, with 15 years left until maturity. Finally, Harry has just issued 10,000 shares of 3%, $50 preferred stock.
The current required rates of return are 11.4% for the common stock, 7.9% for the coupon bonds, and 3.7% for the preferred stock.
a)Given all of this, what is the total value of the Harry’s equity and debt holdings TODAY?
b)Now, fast forward three years from today. What would you give as the price of Harry’s equity and debt holdings if the yields change to 11.9%, 7.4%, and 4.1% for the common stock, coupon bonds, and preferred stock, respectively?
Explanation / Answer
a) Growth rate in Dividend = (1.10 - 1.00) / 1.00 = 0.1 or 10%
Next year Dividend(D1) = 1.46 x 110% = $1.61 per share
Market Price of Common Stock = D1 / (Ke - g) = 1.61 / (0.114 - 0.10) = $115
Preferred Dividend = 50 x 3% = $1.50 per share
Market Price of Preferred Stock = 1.5 / 3.7% = $40.54
Total value of the Harry’s Common equity = 115 x 50,000 = $5,750,000
Total value of the Harry’s Preferred Stock = 40.54 x 10,000 = $405,400
Market Price of Bond = 80 x PVAF(7.9%, 15 years) + 1,000 x PVF(7.9%, 15years) = 80 x 8.612 + 1,000 x 0.320 = $1,008.96
Total value of the Harry’s debt holdings = 1,008.96 x 300 = $302,688
Value of Equity plus Debt Holdings = 5,750,000 + 405,400 + 302,688 = $6,458,088
b) Only Price of the securities is asked in this part. So we will find only the prices.
Dividend of Four years from today = 1.46 x (1.10)4 = $2.14 per share
Price of Common stock at T3 = D4 / (Ke - g) = 2.14 / (0.119 - 0.10) = $112.63
Price of Preferred Stock = 1.5 / 4.1% = $36.59 per share
Debt has now 12 years till maturity. Thus, Market price of Bond is
Bond Price = 80 x PVAF(7.4%, 12 years) + 1,000 x PVF(7.4%, 12years) = 80 x 7.776 + 1,000 x 0.425 = $1,046.66
Note: Please refer PVAF and PVF table for the value of PVAF and PVF respectively.
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