Input to the constant-growth valuation model

Assignment Help Financial Management

Reference no: EM131523286

Hamlin Steel Company 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 6%. The risk-free rate is currently 8%. Craft's dividend per share for each of the past 6 years is shown in the following table:

Year Dividend per share

2015 $2.72

2014 $2.59

2013 $2.47

2012 $2.35

2011 $2.24

2010 $2.13

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. 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 5%.

a. The required return on Craft's stock is

The maximum cash price that Hamlin should pay for each share of Craft is

b. (1) If the dividend growth rate decreases by 2%, the maximum cash price that Hamlin should pay for each share of Craft is $

(2) If the risk premium decreases to 5% the required return on Craft's stock is

With a 13% required return, the maximum cash price that Halin should pay for each share of Craft is $

Reference no: EM131523286

Questions Cloud

Mary retired from her job : Mary retired from her job on january 1 and will recieve monthly pension benefits of $2000 per month. how much must mary include in her gross income in year 1?

Internal rate of return on this investment : What was Joes internal rate of return on this investment?

A car loan that outlasts your car : A Car Loan That Outlasts Your Car. The article mentioned that a $20,000 loan with an 8% interest rate over 8 years instead of a 5% loan over 5 years

Cash flows are expected to grow at constant rate : The firm's value if cash flows are expected to grow at a constant rate of 9% from now to infinity

Input to the constant-growth valuation model : determine the applicable discount rate to use as an input to the constant-growth valuation model.

Determination of the hedge ratio in the two-state model : Reconsider the determination of the hedge ratio in the two-state model where we showed that one-third share of stock would hedge one option.

What was your total return for past year : You purchased a zero-coupon bond one year ago for $285.33. what was your total return for the past year?

Maturity that pays semi-annual interest : Consider a $1,000 face value 6% coupon bond with 3 years left to maturity that pays semi-annual interest.

How much new long-term debt financing will be needed : What was Wallace's total long-term debt in 2016? How much new long-term debt financing will be needed in 2017?

User Account

All Pages