Activity: Dividends

You receive an urgent text message from Bob.

Text Message from BOB:

Continuing expansion of the company requires that we determine the company's stock valuation under the new growth assumptions. I know you have a lot on your plate, but I need you to work with me on the projections for our company's stock going forward.

This year Fundamental Toys is on target for paying $1.24 per share in dividends.

Next year the president and the Board expect to see a growth at 7%.The following year has a projected growth accelerate to reach 10% and continue at 10% for another 3 years.After that it will fall back to the current 7% growth. To summarize: Year 1= 7%; Years 2, 3, 4 = 10%; then going forward = 7%.

You are not totally familiar with these calculations, but this is a good learning opportunity. Some guidelines have been provided below.

1. Please use the nonconstant growth model to calculate the expected price of the stock now.
2. Determine the one additional component X you need to use to figure this out in the nonconstant growth model.
3. Here is information that might help you determine X: our beta is about 1.32. If you decide to use the CAPM, please use the 3-month Treasury bill rate fromhttp://www.bloomberg.com/markets/rates/index.html.

With this information in hand, you can proceed as follows:

• First use CAPM to determine your factor X.
• Then start applying the nonconstant and constant growth models to determine your cash flows per period.
• Do not forget to calculate the horizon or terminal value of the company's stock.
• Discount the obtained cash values.
• Sum the discounted values up for the price of stock valuation.

Deliverables

The end result should be the calculated price of the company's stock.