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1. Shifty Co. issues a 20-year bond, increasing its total debt by $5 million. The current stock price of Shifty Co. is $50 per share.
1. Shifty Co. issues a 20-year bond, increasing its total debt by $5 million. The current stock price of Shifty Co. is $50 per share. There are 1 million shares of the stock outstanding. The stock earned $3.60 per share in the last 12 months. The company PE ratio is 10. What will happen to the price of the stock if Shifty uses the money from the bond to buy shares of its stock keeping everything else without any changes? (Hint: You will need to find the new outstanding number of shares and EPS) (15 points)
2. If STU stock has been paying a dividend that has increased at a rate of 5% annually for the past 10 years, the last dividend paid was $8.50, and the required return of the stock is 17%, what should the price be according to the constant growth dividend model? (10 points)
3. Given the following information find the required return for the Greasy Spoon Caf. The last dividend was $10, the current price of the stock is $200, and the growth rate of the dividend has consistently been 6% per year. (10 points)
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