Hamlin Steel Comoany wishes to determine the value of Craft Foundry, a firm that

Question

Hamlin Steel Comoany wishes to determine the value of Craft Foundry, a firm that it is considering acquiring for cash. Hamlin wishes to determine the applicable discount rate to use as an input to the constant-growth valuation model. Craft's stock is not publicly traded. After studying the required returns of firms similar to Craft that are publicly traded, Hamlin believes that an appropriate risk premium on Craft stock is about 4%. The risk-free rate is currently 6%. Crafts dividend per share for each of the past 6 years is shown in the following table (the picture I posted.)

A. Given that Craft is expected to pay a dividend of $2.86 next year, determine the maximum cash price that Hamlin should pay for each share of Craft. (Hint: round the growth rate to the nearest whole percent.)

B. If there is a decrease in its dividend growth rate of 2% tthe maximum cash price that Hamlin should pay for each share of Craft is?

C. With a 9% required return, the maximum cash price that Hamlin should pay for each share of craft is?

Explanation / Answer

Growth rate fof the dividends =(2.67/1.91)^(1/5)-1

= 6.92%

requires return = risk free rate + risk premium =10%

a) maximum cash price = D1/(r-g)

=2.86/(10%-6.92%)

=93.12

b) Maximumcash price using above formula

=56.39

c) at 9%

Stock price owuls change to 70.25

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