Reference no: EM131543319

Wiser Drug is looking at acquiring the smithson & smithson (S&S) pharmaceutical company. They have asked you to use the capital asset pricing model (CAPM) to determine the rate to be use by them as an investor in considering this acquistion. Later on they may be asking you to value S&S using the constant growth valuation model. S&S is not publicly traded. Wiser has provided you with a study of beta of firms in thier industry and has asked you to use a beta of 1.25 for S&S. The current risk-free rate is 9% and the market is current providing a return of 13%. The recent history of the dividends per share of S&S is shown on the following table. Year 2006 2005 2004 2003 2002 2001 Dividend 3.44, 3.28 3.15 2.90 2.75 2.45 S&S is expected to pay dividend per share next year of $3.68

Required: A. Calculate the growth rate of above listed dividends

B. Using CAPM determine the maximum cash price that Wiser should pay for each share of S&S

C. Using the CAPM approach and holdling other things constant, determine the effect on the stock price of a 2% lower growth rate than that shown in its dividend history. Provide a brief comment suggesting investors response to the change as shown in the changed stock price.

D. Using the CAPM approach and growth rate shown in the dividend history, determine the effect of the resolution of a patent infringement some legal action that should lower the beta for S&S to 1.0. Provide a brief comment suggesting investors reponse to the change as shown in the changed stock price.