This homework submission should include all calculations, completed on the designated tab of the Homework Student Workbook,
and a document explaining the implications of your findings for the
business or business transaction. After reading the assigned chapters,
address the following questions:
- 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.
- 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.
- 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
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