StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Module Five Mini Case: Corporate Finance - Assignment Example

Cite this document
Summary
"Module Five Mini Case: Corporate Finance" paper describes briefly the legal rights and privileges of common stockholders, writes out a formula that can be used to value any stock, regardless of its dividend pattern, and identifies the firm’s expected dividend stream over the next 3 years…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER93.5% of users find it useful
Module Five Mini Case: Corporate Finance
Read Text Preview

Extract of sample "Module Five Mini Case: Corporate Finance"

Running Head: minicase Module Five Mini Case of the of the of the . Module Five Mini Case a. Describe briefly the legal rights and privileges of common stockholders (Ehrhardt & Brigham, 2006). Common stockholders are owners of the company, though of a very small part. As they own the company, they have the right to vote and elect the board of directors. Secondly they have the preemptive right, i.e. the right to buy any additional shares issued by the company. b. (1) Write out a formula that can be used to value any stock, regardless of its dividend pattern (Ehrhardt & Brigham, 2006). = (2) What is a constant growth stock How are constant growth stocks valued (Ehrhardt & Brigham, 2006) Constant growth stocks are stocks whose dividends are expected to grow at a constant rate in the future. They are valued with the following formula: = = . (3) What happens if a company has a constant g that exceeds its rs Will many stocks have expected g > rs in the short run (i.e., for the next few years) In the long run (i.e., forever) (Ehrhardt & Brigham, 2006) The above model can only be used when g is less than rs, otherwise it would give a negative stock value which isn't logical. Therefore the formula can only be used when i. g is less than rs ii. g is expected to be constant iii. g is expected to continue indefinitely. In the short-run, stocks may have super normal growth, in which g > rs However, this isn't sustainable, and therefore in the long-run g < rs. c. Assume that Temp Force has a beta coefficient of 1.2, that the risk-free rate (the yield on T-bonds) is 7.0%, and that the market risk premium is 5%. What is the required rate of return on the firm's stock (Ehrhardt & Brigham, 2006) rs = rRF + (rM - rRF) Temp Force = 7% + (12% - 7%)(1.2) = 7% + (5%)(1.2) = 7% + 6% = 13%. d. Assume that Temp Force is a constant growth company whose last dividend (D0, which was paid yesterday) was $2.00 and whose dividend is expected to grow indefinitely at a 6% rate. (1) What is the firm's expected dividend stream over the next 3 years (Ehrhardt & Brigham, 2006) 0 1 2 3 4 | | | | | D0 = 2.00 2.12 2.247 2.382 1.88 1.76 1.65 . . . (2) What is the firm's current stock price (Ehrhardt & Brigham, 2006) = = = = $30.29. (3) What is the stock's expected value 1 year from now (Ehrhardt & Brigham, 2006) = = = = $32.10. (4) What are the expected dividend yield, the capital gains yield, and the total return during the first year (Ehrhardt & Brigham, 2006) Total return = 13.0% Dividend yield = $2.12/$30.29 = 7.0% Capital gains yield = 6.0% The dividend yield in the first year is 10 percent, while the capital gains yield is 6 percent. e. Now assume that the stock is currently selling at $30.29. What is the expected rate of return on the stock (Ehrhardt & Brigham, 2006) s= s= $2.12/$30.29 + 0.060 = 0.070 + 0.060 = 13%. f. What would the stock price be if its dividends were expected to have zero growth (Ehrhardt & Brigham, 2006) 0 1 2 3 | | | | 2.00 2.00 2.00 1.77 1.57 1.39 . . . P0 = 15.38 P0 = PMT/r = $2.00/0.13 = $15.38. g. Now assume that Temp Force is expected to experience supernormal growth of 30% for the next 3 years, then to return to its long-run constant growth rate of 6%. What is the stock's value under these conditions What is its expected dividend yield and capital gains yield in Year 1 In Year 4 (Ehrhardt & Brigham, 2006) 0 1 2 3 4 | | | | | 2.600 3.380 4.394 4.658 2.301 2.647 3.045 46.116 54.109 The stock price is $54.109, under these conditions. Dividend yield = = 0.0480 = 4.8%. Capital gains yield = 13.00% - 4.8% = 8.2%. The dividend yield in year 1 is 4.80 percent, and the capital gains yield is 8.2 percent. After year 3, the stock becomes a constant growth stock, with g = capital gains yield = 6.0% and dividend yield = 13.0% - 6.0% = 7.0%. h. Is the stock price based more on long-term or short-term expectations Answer this by finding the percentage of Temp Force's current stock price based on dividends expected more than 3 years in the future (Ehrhardt & Brigham, 2006). = 85.2%. The stock price is based on long-term expectations as around 85 percent of the stock price is determined by the dividends expected more than three years from now. i. Suppose Temp Force is expected to experience zero growth during the first 3 years and then to resume its steady-state growth of 6% in the fourth year. What is the stock's value now What is its expected dividend yield and its capital gains yield in Year 1 In Year 4 (Ehrhardt & Brigham, 2006) 0 1 2 3 4 | | | | | 2.00 2.00 2.00 2.00 2.12 1.77 1.57 1.39 20.99 25.72 = During year 1: Dividend Yield = = 0.0778 = 7.78%. Capital Gains Yield = 13.00% - 7.78% = 5.22%. In year 4 Temp Force becomes a constant growth stock; hence g = capital gains yield = 6.0% and dividend yield = 7.0%. j. Finally, assume that Temp Force's earnings and dividends are expected to decline by a constant 6% per year, that is, g = -6%. Why would anyone be willing to buy such a stock, and at what price should it sell What would be the dividend yield and capital gains yield in each year (Ehrhardt & Brigham, 2006) As the company is giving out some dividends, therfore it must have a value greater than zero. Therefore, some people buy suc stocks. = = = = = $9.89. Since it is a constant growth stock: g = Capital Gains Yield = -6.0%, hence: Dividend Yield = 13.0% - (-6.0%) = 19.0%. The dividend and capital gains yields are constant over time, but a high (19.0 percent) dividend yield is needed to offset the negative capital gains yield. k. What is market multiple analysis (Ehrhardt & Brigham, 2006) The market multiple analysis is an another way of valuing stocks, in which market-determined multiple is applied to netincome, salaes, book value, or subscribers. For example, if a company's forecasted EPS is $10, and the average price per share to EPS (P/E ratio) is for similar companies is 15, then the estimated stock price per share is $150 ($10 x 15). In the P/E multiple analysis, we take the company's EPS and multiply it with the market multiple to get the stock's value. However, there are some problems in using the market multiple analysis. Firstly, it is hard to find comparable firms. Secondly, the average ratio for the sample of comparable firms often has a wide range. For example, the average P/E ratio might be 20, but the range could be from 10 to 50. Reference Ehrhardt, M. C., & Brigham, E. F. (2006). Financial Management: Theory & Practice. Thomson South-Western. Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(Module Five Mini Case: Corporate Finance Assignment Example | Topics and Well Written Essays - 1000 words, n.d.)
Module Five Mini Case: Corporate Finance Assignment Example | Topics and Well Written Essays - 1000 words. https://studentshare.org/finance-accounting/1516945-corporate-finance-minicase
(Module Five Mini Case: Corporate Finance Assignment Example | Topics and Well Written Essays - 1000 Words)
Module Five Mini Case: Corporate Finance Assignment Example | Topics and Well Written Essays - 1000 Words. https://studentshare.org/finance-accounting/1516945-corporate-finance-minicase.
“Module Five Mini Case: Corporate Finance Assignment Example | Topics and Well Written Essays - 1000 Words”. https://studentshare.org/finance-accounting/1516945-corporate-finance-minicase.
  • Cited: 0 times

CHECK THESE SAMPLES OF Module Five Mini Case: Corporate Finance

Expansion of XYZ Telecom into the Indian Market

Bank loan facility such as bank guarantee to be made in between employers and bankers and the bankers provide the finance on an instalment basis i.... Economic Factors: Traders has to consider the situation of finance in the business if it is short or long term.... The author of the following case study "Expansion of XYZ Telecom into the Indian Market" brings out that XYZ Telecom is a UK based company and has a major presence in the country and many markets in Europe....
11 Pages (2750 words) Case Study

The Importance of Technology Trust

Information technology is applied in different aspects of the business which includes the Inventory management system, salesforce administration, human resource management system, customer relationship management, and finance and accounts.... This paper "The Importance of Technology Trust" sheds some light on the explosive growth of the internet and the open growth of the telecom markets that allow benefits for the sophisticated users but at the same time, the security problems hamper progress....
8 Pages (2000 words) Case Study

Google Inc as an Example of E-business Success

Another device to attract small businesses was the AdWords program (“Google corporate History,” 2007).... The paper "Google Inc as an Example of E-business Success" discusses that in general, Google has established a much better e-business as compared to Yahoo.... This is mainly because of the transformation process it has undertaken throughout its evolution....
12 Pages (3000 words) Case Study

Strategies for Competitive Advantage

nbsp;Mintzberg (1998) has described that a rational process of analysis and planning takes a backseat and hard bargaining is the ploy used by corporate elites for obtaining strategic and tactical advantages.... Such can be the case of monopolistic companies or those that are controlled by the State.... n an earlier article, Mintzberg and Winters (1985) have described five kinds of strategies deployed by leaders.... n fact these five strategies as the spectrum that demonstrates the two extremes and what lies between them when strategies are planned and are useful to the extent that they show the intensity of the strategy evolution process....
4 Pages (1000 words) Case Study

Great Lakes Main Capabilities

It also studies how Porters' five forces of competition affect the company.... This paper “Great Lakes' Main Capabilities” analyses the external environment of the company which comprises of the political, environmental, social/demographic, technological, and the economic environment....
8 Pages (2000 words) Case Study

The Added Value of Computer Based Information Systems in Organisation

The three levels of decisions can be classified as corporate level decision, business level, and operational level decisions.... This case study "The Added Value of Computer-Based Information Systems in Organisation" asserts that information systems alter the way organizations operate and the way businesses compete in the market....
13 Pages (3250 words) Case Study

A Comprehensive Report on Creating a Football Events Committee

The paper "A Comprehensive Report on Creating a Football Events Committee" states that the service that the business will provide to the valued customers is football events which will fulfil the sports needs of our customers i.... .... provide the participants with the best football experience....
20 Pages (5000 words) Case Study

The Protection of the Information in BioMed Company

BioMed Company like other enterprises has corporate cell phones that use the GSM network.... The paper "The Protection of the Information in BioMed Company" examines the vulnerabilities associated with this information when the GSM network is used to conduct project activities.... An action was developed to cater to the effective protection of information being subjected to the GSM network....
12 Pages (3000 words) Case Study
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us