Q1 (5 points): Horse and Buggy Inc. is in a growing industry. Sales, earnings, a

Question

Q1 (5 points): Horse and Buggy Inc. is in a growing industry. Sales, earnings, and dividends are all growing at a rate of 6% per year. If r = 10% and DIV1 = $4, what is the current value of a share? What price do you forecast for the stock next year? Which of the following statements is most correct for this company and why?
a. The expected return on the stock is 6 percent a year.
b. The stock%u2019s dividend yield is 6 percent.
c. The stock%u2019s price one year from now is expected to be 6 percent higher.



Q2 (15 points): A company estimates they will sell 100,000 units (@$10/unit) of a new product starting from year 1 and sales will grow at 6% for four years until year 5. All sales are cash. Fixed costs are $400,000 annually. Variable costs are $5/unit. The new machinery to manufacture the product will cost $500,000 in year 0 and be depreciated straight line over the next five years. The tax rate is 34%. What are the annual operating cash flows? At the end of the period the machinery will be sold for $50,000 (after taxes) and no new sales will occur. What are the annual total cash flows? What is the NPV if the project has a 13% required return? (Hint: I will start with the Net Income Projection on the next slide.)

Explanation / Answer

4/.10-.06)= $10.00 per share.

next year it should be 4 (1.06)/(.10-.06)= $10.60 so c is the answer.

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