Reference no: EM132594662

1.a.) The common stock of ABC company closed at $2.3 per share today, down $0.15 from yesterday. If the company has 4.5 million shares outstanding and annual earnings of $12.5 million, what is its P/E ratio today? What was its P/E ratio yesterday?

b.) Julie's X-Ray Company paid $2.00 per share in common stock dividends last year. The company will allow its dividend to grow at 5 percent for 4 years, and after that, the rate of growth will be 3 percent forever. What is the value of the stock if the required rate of return is 8 percent?

c.) Giant Enterprises' stock has a required return of 14.8%. The company, which plans to pay a dividend of $2.60 per share in the coming year, anticipates that its future dividends will increase at an annual rate consistent with that experienced over the 2013-2019 period, when the following dividends were paid.

Year Dividend per share

2019 $2.45

2018 2.28

2017 2.10

2016 1.95

2015 1.82

2014 1.80

2013 1.73

a. If the risk-free rate is 4%, what is the risk premium on Giant's stock?

b. Using the constant-growth dividend model, estimate the value of giant's stock.

c. Explain what effect, if any, a decrease in the risk premium would have on the value of Giant's stock.

2.) Axis Corp. is considering investment in the best of two mutually exclusive projects. Project Kelvin involves an overhaul of the existing system; it will cost $45,000 and generate cash inflows of $20,000 per year for the next 3 years. Project Thompson involves replacement of the existing system; it will cost $275,000 and generate cash inflows of $60,000 per year for 6 years. Using an 8% cost of capital, calculate each project's NPV and make a recommendation based on your findings.