Tangshan Antiques has a beta of 1.40, the annual risk-free rate of interest is c

Question

Tangshan Antiques has a beta of 1.40, the annual risk-free rate of interest is currently 10 percent, and the required return on the market portfolio is 16 percent. The firm estimates that its future dividends will continue to increase at an annual compound rate consistent with that experienced over the 2000-2003 period.

Year/ Dividend
2000/ $2.70
2001/$2.95
2002/ $3.25
2003/ $3.40

(a) Estimate the value of Tangshan Antiques stock.

(b) A lawsuit has been filed against the company by a competitor, and the potential loss has increased risk, which is reflected in the company's beta, increasing it to 1.6. What is the estimated price of the stock following the filing of the lawsuit.

Explanation / Answer

Tangshan Antiques has a beta of 1.40, the annual risk-free rate of interest is currently 10 percent, and the required return on the market portfolio is 16 percent. The firm estimates that its future dividends will continue to increase at an annual compound rate consistent with that experienced over the 2000-2003 period.

Year/ Dividend
2000/ $2.70
2001/$2.95
2002/ $3.25
2003/ $3.40

(a) Estimate the value of Tangshan Antiques stock. ( ks = 0.10 + 1.4(0.16 – 0.10) = 0.184 growth rate of dividends = $3.40/$2.70 = 1.259 FVIF3, k = 8% Po = $3.40(1.08)/(0.184 – 0.08) = $35.31 b) A lawsuit has been filed against the company by a competitor, and the potential loss has increased risk, which is reflected in the company's beta, increasing it to 1.6. What is the estimated price of the stock following the filing of the lawsuit.
ks = 0.10 + 1.6(0.16 – 0.10) = 0.196 Po = $3.40(1.08)/(0.196 – 0.08) = $31.66

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