mathxl.com Assignments Take a Test Claudia Torres FINA3313 Fall 2017 (1) Claudia
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mathxl.com Assignments Take a Test Claudia Torres FINA3313 Fall 2017 (1) Claudia Torres | 12/14/17 11:53 PM Quiz: Practice Questions Chapter 7 (Module 3: Stock Valuation) Submit Quiz This Question: 1 pt 6 of 17 (5 complete) This Quiz: 17 pts possible Question Help Integrative Risk and Valuation Hamlin Steel Company wishes to determine the value of Craft Foundry, a firm that it is considering aoquiring for cash. Hamlin wishes to determine the applicable discount rate to use as an input to the constant growth valuation model. Crafts stock is not publicytraded. After studying the required returns of firms smilar to Craft that are publicly traded, Hamlin be eves that an appropriate risk premium on Craft stock is about 4%. The nsk-free rate is currently 8%. Crafts dividend per share for each of the past 6 years is shown in the following table: a. Given that Craft is expected to pay a dividend of $3.85 next year, determine the maximum cash price that Hamlin should pay for each share of Craft. (Hint: Round the growth rate to the nearest whole percent.) b. Describe the effect on the resulting value of Craft from: (1) A decrease in its dividend growth rate of 2% from that exhibited over the 2010-2015 period. (2) A decrease in its risk premium to 3%. a. The required return on Craft's stock is 1%. (Round to the nearest whole percentage.) The maximum cash price b. 1) If the dividend growth rate decreases by 2%, the maximum cash price that Hamlin shoukd pay for each share of Craft is(Round to the nearest cent.) (2) If the risk premium decreases to 3%, the required return on Crat's stock is 56, (Round to the nearest whole percentage.) with a 11% required return, the maximum cash price that Hamlin should pay for each share of Craft is$. (Round to the nearest cent.) Price is a furnction of the current dividend, that Hamlin should pay for each share of Craft is Round to the nearest cent.) 1. and the risk-free rate, and the company-specific .For Craft, the lowering of the dividend growth rate future cash flows resulting in | in share price. The decrease in the nsk premium reflected In risk leading to in share price. (Select the Data Table Click on the icon located on the top-right corner of the data table below in order to copy its contents Into a spreadsheet.) Year 2015 2014 2013 2012 2011 2010 Dividend per share 53.60 $3.36 $3.14 $2.94 $2.74 52.57 Enter your answer in each of the answer boxes.Explanation / Answer
Required rate of return on Craft's stock=8%+4% 12% Maximum Cash price that Hamlin should pay= Growth rate=(3.60/2.57)^(1/5)-1 0.069729 or 7% P0=D1/(Ke-g)=3.82/(.12-.07) 76.4 If dividend growth Rate decreases by 2% Then growth rate would be 7%-2% 5% D1 will be= 3.60*1.05 3.78 P0=3.78/(.12-.05) 54.0 If Rp decrease to 3% than ke will be 8%+3% 11% P0=D1/(Ke-g)=3.82/(.11-.07) 95.5 Price is a function of current dividend, expected growth rate and risk free rate and the company specific Risk Premium. For Craft lowering of the dividend growth rate reduced future cash flow resulting in reduction in share price. The decrease in the risk premium reflected reduction in risk leading to increase in share price
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