Reference no: EM13691826

Writing a business memo which explains the attached spreadsheet solution, in English terms. You do not need to create a spreadsheet for this question, only write a memo that will correspond with the spreadsheet I have already created. It is attached for your reference.

Basic Functions and Spreadsheet Review
To: You
From: Your boss
Date: September 1, 20xx
Subject: What do our stockholders expect from us?

We need to determine our "cost of capital" in order to put a value on our business. The "cost of capital" is the return that our stockholders expect to get from their investment in our company, from the combination of the dividends we pay and the increase in the value of our stock over the year. We are not a publicly-traded company, so we can't figure out this value directly. Instead, we need to compare ourselves to a similar company.

After consulting with some major stockholders, they say that they consider us to be most like our competitor, Abercrombie, Inc., which is publicly-traded, so we should have a similar cost of capital. One common model for calculating stock prices (called the Gordon Model), says that the price of a share of stock is equal to the next expected dividend to be paid, divided by the difference between the cost of capital and the annual rate of growth in those dividend payments.

Abercrombie's stock price is currently $65.00 per share and they are expected to pay $2.00 in dividends over the next year. This level of dividends has consistently grown by 10.00% over the past few years, and most investors expect this growth rate to continue.

I'd like to see a spreadsheet that determines Abercrombie's cost of capital, and then computes what our stock price should be if we had the same cost of capital, assuming we paid a $1.00 dividend, and we grew anywhere from 8.00% to 11.00% over the next year. Explain to me in a memo how you arrived at that answer