Description
3-1 Turbo Technology Computers is experiencing a period of rapid growth. Earnings and dividends are expected to grow at a rate of 15% during the next two years, at 13% in the third year, and at a constant rate of 6% thereafter. Turbo’s last dividend was $1.15, and the required rate of return on the stock is 12%.
Complete the following calculations:
Calculate the value of the stock today.
Calculate P1^ and P2^.
Calculate the dividend yield and capital gains yield for Years 1, 2, and 3.
3-2 Kassidy’s Kabob House has preferred stock outstanding that pays a dividend of $5 at the end of each year. The preferred sells for $50 a share. What is the stock’s required rate of return? Assume the market is in equilibrium with the required return equal to the expected return.
3-3 McCaffrey’s Inc. has never paid a dividend, and when the firm might begin paying dividends is not known. Its current free cash flow (FCF) is $100,000, and this FCF is expected to grow at a constant 7% rate. The weighted average cost of capital (WACC) is 11%. McCaffrey’s currently holds $325,000 of non-operating marketable securities. Its long-term debt is $1,000,000, but it has never issued preferred stock. McCaffrey’s has 50,000 shares of stock outstanding.
Calculate the following:
McCaffrey’s value of operations
The company’s total value
The estimated value of common equity
The estimated per-share stock price
This homework submission should include all calculations, completed on the designated tab of the Homework Student Workbook Spreadsheet, and also include a Microsoft Word document explaining the implications of your findings for the business or business transaction.
