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What is the maximum you would be willing to pay

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Question - Task 1 - In response to the stock market's reaction to its dividend policy, the Paper Company has decided to increase its dividend payment at a rate of 4% per year. The firm's most recent dividend is $3.25 and the required rate of return is 9%. What is the maximum you would be willing to pay for a share of the stock?

Task 2 - Boston Sphere has reported earnings of $8 million. It is expected that earnings will grow at 3% each year in perpetuity if the firm undertakes no new investment opportunities. Stockholders of the firm require 12% return on the stock. What is the price of the stock if the firm does not undertake the new project?

Task 3 - You are evaluating the potential purchase of a small business currently generating $42,500 of after-tax cash flow. Based on a review of similar-risk investment opportunities, you must earn an 18% rate of return on the proposed purchase. Since you are relatively uncertain as to future cash flows, you have decided to estimate the firm's value using two possible cash flow growth rate assumptions.

1) What is the firm's value if cash flows are expected to grow at an annual rate of 0 percent to infinity?

2) What is the firm's value if cash flows are expected to grow at a constant annual rate of 7 percent to infinity?

Reference no: EM133179834

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